December 6, 2021

While the market is up today, the correction that began a month ago remains in force, making it tough for stocks (growth stocks in particular) to make real headway. Thus we have four Sell recommendations today, as well as one upgrade to Buy.

As for the new recommendation, it’s a solid growth company that dominates a totally unexciting industry in the U.S., and long-term prospects are great.

Details inside.

New Recommendation

The past month has brought a sharp correction to the market, to such an extent that our intermediate-term market timing indicator is now negative. Some of the reasons for the correction (if you need reasons) are obvious in today’s news: The pandemic remains a concern, inflation is real, and valuations of stocks have grown high in the long bull market. But that doesn’t mean it’s time to run for the hills yet. Our long-term market timing indicator remains positive, and thanks to the correction, many stocks are now at attractive entry points. Today’s recommendation is an unglamorous solid growth stock that was recommended last week in Mike Cintolo’s Cabot Top Ten Trader. Here are Mike’s latest thoughts.

WillScotMobile (WSC)
If we had our druthers, we’d have a portfolio chock-full of firms that offer a revolutionary new product or service that’s changing the way we work, live or entertain our. When combined with outstanding sales and earnings growth, these stocks are the ones most likely to enjoy sustained rallies. However, there’s nothing wrong with investing in a traditional company that has savvy management; you won’t brag about them at parties, but they do just fine over time and, especially in a challenging market environment, can keep the interest of big investors.

WillScotMobile is just such an outfit. The business itself isn’t something sexy like cloud computing, networking or miracle drugs, but it’s solid and should enjoy dependable, double-digit growth for years to come.

The company is the hands-down leader in the industry of leasing modular workspace and portable storage solutions. Picture the mobile, temporary workspaces you’ll often see at construction sites, along with those huge containers (like seen on container ships) to store equipment and the like. The dominance came thanks to the merger between WillScot and Mobile Mini (completed in the middle of last year), and now the combined entity sports 121 million square feet of space relocatable to anywhere in North America, which is manyfold what clients will find available from regional or local operators.

The company isn’t just boxes, either; in fact, a big growth opportunity comes from value-added products and services. Furniture for the office space is a big one, along with things like shelving, appliances (everyone needs some coffee!), lighting and even insurance, while for services, WillScot is able to offer power generators, dumpsters, restrooms, fences and the like. Anything a client needs at a remote site, WillScot can provide.

As for those clients, construction or industrial/commercial projects make up around 90%-ish of business, which isn’t surprising, but the company also does good business with government, education and even energy customers (which seems like it could grow over time) also chipping in. No customer makes up more than 1% of revenues, giving WillScot plenty of power among big clients, especially given the fact that leases tend to be intermediate- to longer-term (a year or two), which makes sense as larger projects take time to wrap up.

And … that’s really the whole story. Nothing terribly sexy, but a dominant position in what is a gigantic industry: While the immediately addressable market is around $10 billion, the firm touches on many huge areas like job site services (nearly $200 billion annually), commercial storage ($24 billion), office furniture ($24 billion) and more. Combined with some modest M&A here and there (WillScot has taken over four smaller fish this year), the company has plenty of room for expansion.

Indeed, at a recent Investor Day, the top brass sees double-digit EBITDA growth for the next three-plus years and believes free cash flow will eventually rise to around $4 per share—which in turn will be used for share buybacks and more expansion/M&A, further goosing the growth rate. Recent results have been right on that long-term target—Q3 sales rose 18% from a year ago while EBITDA was up 16%, topping expectations.

Wall Street certainly thinks the future is bright. WSC hit new all-time highs a year ago and rallied all the way to 30 or so in April before taking a rest. But the sellers never really took control, which was interesting, with shares falling a maximum of 14% from high to low despite the big post-crash advance. WSC got going again in October, racing to new highs before and after earnings and the Investor Day, and the latest pause has been impressive, given the market’s horrid action, with a controlled dip to the 25-day moving average. If the broad market weakens further, lower prices are possible—the 50-day moving average is down at 35—but overall, conditions look ripe for a move higher over time.

Current Recommendations and Changes

Current Recommendations

The broad market has now given us its most significant correction since March 2020 (that one was huge; this one is minor so far), and thus our portfolio has been shaken up a bit; this week we have four sell recommendations. And that’s a good thing, as the cash raised insulates us (a bit) from further damage. After the four sells today and the new buy, the portfolio will be 20% in cash, but if the weakness continues, we can certainly raise more. Mike Cintolo, Cabot’s market-timing guru, is already 58% in cash in Cabot Growth Investor! Details below.

Changes
Dexcom (DXCM) to Sell
General Motors (GM) to Sell
Sea, Ltd. (SE) to Buy
Signet Jewelers (SIG) to Sell
Snowflake (SNOW) to Sell

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. Last week the stock gapped up to a new high after the company released a great earnings report, but it then sank back down as the broad market weakened. In his update last week in Cabot Growth Investor, Mike wrote, “AMBA was one of a few growth stocks that (a) got hit during the past three weeks, but (b) never really did anything wrong, “only” dipping to its 50-day line after a big run. And the earnings report on Tuesday evening has improved the stock’s position. In Q3, sales rose 64% and earnings were up six-fold, both topping estimates, and while the company said component shortages (read: supply-chain issues) were still a big challenge, the bigger story here is that the company has taken the lead as the go-to leader in automotive computer vision chips. Indeed, the firm said its future automotive business has tripled since a year ago, with one big win (Ambarella’s chips are found in the Rivian R1T truck, which has begun shipping) helping perception. (A European firm also said dash cameras are in a pilot with Uber as well.) There were numerous other customers launching new products using the firm’s chips, including the leading security camera players in Europe and Korea, as well as Johnson Controls here in the U.S. The supply-chain issue is certainly something to watch—the top brass said Q4 results will be constrained because of it—but there’s no question the big picture here is very bullish. As for the stock, the moonshot on Wednesday was bullish, though in a weak market it could easily give a chunk of that back.” BUY

Bristol Myers Squibb Company (BMY), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, and featured here three weeks ago, has been relatively active in recent weeks, dipping lower and then bouncing quickly back, but it’s still below our initial buy point and thus an even better value. In his update last week, Bruce wrote, “If Bristol can demonstrate at least the reasonable potential for merely stable revenues during its patent expiration period, which we believe will happen, the shares are remarkably undervalued. On a free cash flow yield basis, assuming an average of $15 billion/year, the shares trade at a 12% free cash flow yield. BMY shares have about 46% upside to our 78 price target. Valuation remains remarkably low at 6.8x estimated 2022 earnings, compared to 11x or better for its major peer companies. The stock’s 6.4x EV/EBITDA multiple is similarly cheap, compared to 9-10x or better for peers. We believe the earning power, low valuation and 3.7% dividend yield that is well-covered by enormous free cash flow make a compelling story.” BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is on a normal, shallow correction from its latest high on November 18. In his update last week, Tom wrote, “This technology stalwart cooled off after going on a tear from early October until the middle of November. Recent action is partly a normal consolidation and partly because of recent weakness in the sector and the Omicron selloff. But business has been booming and I expect the stock to continue trending higher over the longer term. It’s also worth noting that Broadcom reports earnings in a little over a week. That could get the stock going again.” BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, hit a record high four weeks ago and has pulled back normally since. If you’re looking for a way to benefit from our country’s increased spending on infrastructure, BIP is a good vehicle, and the present pullback provides a timely opportunity. Just be sure you understand the tax consequences of investing in a partnership. HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, gapped down two weeks ago after releasing its third-quarter report, but the stock has been up since. In his latest update, Bruce wrote, “Cisco will be presenting at several conferences in December. The Barclays Global Technology, Media and Telecommunications Conference presentation on December 8 will be given by board chair and CEO Chuck Robbins. It appears that all of Cisco’s presentations will be webcast live for all investors. CSCO shares have about 10% upside to our 60 price target. The shares remain attractively valued, and offer a 2.7% dividend yield. We continue to like Cisco.” BUY

Coinbase (COIN), originally recommended by Tyler Laundon in Cabot Early Opportunities, and featured here last week, was hit hard by the market’s correction, and is now nearly back to its base of last summer, which saw support at the 220 level. We could sell here and take our loss (as I often do for the largest loss in the portfolio) but I’m going to stick with it, because such volatility was to be expected, because the volume on the downside was light, and because I see a good chance for a rebound. If you haven’t bought yet, perhaps because you were waiting for a lower entry point, you can buy here. BUY

Dexcom (DXCM), originally recommended by Mike Cintolo in Cabot Growth Investor, was also hit hard last week, and as a result Mike sold. Here’s what he wrote last week: “Nothing has changed with Dexcom the company, but the stock has gotten caught up in the market’s selling wave, at least partially on fears that the reaction to another Covid spike could crimp business—we’ve already seen New York state limit elective procedures, and the fewer (non-Covid) doctor visits, the slower uptake could be for Dexcom’s glucose monitors if other states follow suit. We’ve given the stock plenty of rope here, even holding through the dip below the 50-day line earlier this week, but the lack of any support (no ability to bounce yet), our growing loss and the weak market had us cutting bait on the special bulletin this morning.” SELL

Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, has held firm at its little base in the 130 area, setting up for its next advance. In his update last week, Mike wrote, “FND has actually been mostly flat since its earnings dip earlier this month, which is nearly heroic given the destruction seen in so many stocks out there. Fundamentally, the company seems to be on track—it presented yesterday at an investor conference with nothing new, good or bad—and the fact that the virus has reemerged as a worry isn’t necessarily a bad thing for Floor & Décor, as it saw business mushroom late last year. (Sinking interest rates don’t hurt business, either.) Still, we’re just going to play it by the book: The long-term growth story is intact and, with the stock holding up relatively well, we’re sitting tight, though a dip toward 120 could have us changing our mind.” HOLD

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, peaked at 65 a few weeks ago and has pulled back normally since, and now Bruce says it’s time to take our profit. In his update last week, he wrote, “Today we are moving General Motors (GM) from Buy to Sell. General Motors has made a remarkable transition from bankruptcy in 2009 to a highly profitable and innovative contender in the rapidly changing global auto industry, driven by CEO Mary Barra. However, with the shares at about $62, we think the risk/reward trade-off has moved into unfavorable territory and are thus moving the shares to Sell.

The potential upside comes from GM transitioning to an electric vehicle world, eventually offering a wide array of luxury and mass-market EVs, along with related services that could be highly profitable. GM’s Ultium battery segment could, theoretically, become a major competitive advantage. In an ideal case, if GM can create a cost-effective and long-range battery when others can’t, GM could have a monopoly on the primary component of EVs, and thus have a huge profit and volume advantage.

But potential downside comes from many sources. Battery technology is being developed by many well-capitalized companies and it’s unlikely that any breakthrough or edge will be enduring. Ultimately, we see batteries degenerating into a low-margin, capital-intensive business. We also see the expansion of EV cars into the mid-priced mainstream segment as being many years away – especially as nearly all EVs today are high-end vehicles costing at least $60,000. The future profitability of EVs isn’t clear: High margins for today’s EVs primarily come from their luxury appointments which don’t cost much to produce but add an immense amount of profits – strip out these luxuries and the price per vehicles falls sharply but the costs don’t. This could crimp margins on EVs.

We see the sum-of-the-parts valuation of GMs EV and other advanced technologies using peers like Tesla, Rivian, Lucid and others as not very meaningful – GM will not spin-off its EV or other operations to unlock this comparison. Also, we believe that GM’s investor base is very different from its pure-play speculative competitors’ investor base, such that GM shares won’t capture the (elevated) valuations of its peers.

Other risks include the cyclicality of the auto business – and we’re near the top of the cycle now. A remote but non-zero risk is that relations with China deteriorate further such that the Chinese market becomes sharply less attractive to GM, removing a major source of profits.

Perhaps the lynchpin of the deterioration in the risk/return trade-off is GM’s elevated capital spending. With the price of EV failure so high, we believe GM will not take its foot off the capital spending pedal. We see this permanently elevated spending siphoning off much of the company’s free cash flow indefinitely.

With this Sell, GM has produced about a 69% total return since our initial recommendation on December 31, 2019 and about a 145% total return since the current analyst assumed coverage and re-affirmed the Buy rating on July 1, 2020.” SELL

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 on big volume last week and continued lower today. From here, it could rally, or it could continue lower; either course looks evenly possible to me. So I’m going to hold, because long-term fundamentals look great. But if you’re looking to reduce risk, you could certainly take your profit here. For the record, Tyler is still holding the stock, (though not providing updates), while Mike has sold the stock. HOLD

Marvell Technology (MRVL), originally recommended by Carl Delfeld in Cabot Explorer, gapped up big last week after the chipmaker released an excellent quarterly report. Revenues were up 61% from the year before (an accelerating trend) while earnings were up 72%! I’ll relay Carl’s comments on the report next week. BUY

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, has fallen 35% from its high in just seven weeks and now might be a good buy. In fact, Tyler Laundon just added it to his Cabot Early Opportunities last week, making this the rare stock that has been recommended by three other analysts. In his update last week, Carl wrote, “If the stock continues to weaken, I will move this to a strong buy as its growth fundamentals are clear. 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. Shopee also plans to expand into Poland, India and Spain and is looking at Brazil and France. I also see further potential upside to Sea because of strong momentum in its gaming portfolio and increasing fintech revenues.” Separately, Tyler wrote, “This is a sizeable company that’s evolving quickly, so under the surface of the three businesses there are a lot of moving parts. For instance, reports indicate that Shopee continues to be the dominant platform in Southeast Asia and Taiwan and that rollouts in Europe, Brazil and Mexico are going well, albeit not yet at scale to be very profitable (if at all). And ShopeeFood (food delivery) and buy-now-pay-later services are add-ons that should help propel growth, possibly in very meaningful ways. The bottom line is Sea Limited is a force to be reckoned with in Southeast Asia and with expansions into Europe and Latin America its track record implies years of future growth remain. As we’ve seen with Amazon, these buildouts require intense investment, which will keep Sea from being profitable anytime soon. And with three different businesses there is some give and take quarter to quarter. Scale is the name of the game here, and that’s why we’re buying on this dip.” I’ll upgrade to buy. BUY

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 subsidiary Spear Power Systems signed a multi-year agreement to supply lithium-ion battery systems to Blue Origin, the space exploration company owned by Amazon. We see this as a low-margin but highly valuable marquee win for Sensata. The company’s 2022 outlook remains unchanged. We retain our Buy rating as the longer-term outlook remains encouraging. ST shares have about 34% upside to our 75 price target.” BUY

Signet Jewelers (SIG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a record high just three weeks ago, but the sharp selloff since then has erased nearly all our profit—and one of my rules for investing in growth stocks says that you should never let a solid profit turn into a loss. SELL

Snowflake (SNOW), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here six weeks ago, is a young, fast-growing stock with great prospects as a fast-growing (and very highly valued) cloud enterprise data warehouse services provider. But the stock has been under pressure in recent weeks. Tyler recently recommended selling, and with our small profit essentially erased, I’m going to do the same. SELL

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has held up impressively in recent weeks, but today the stock has dipped to its 50-day moving average for the first time since August, increasing the possibility that it’s time for a long cooling-off period. Fundamentally, however, all is well with the company, as demand continues to exceed supply, even as capacity continues to expand rapidly. One of the underappreciated aspects of Tesla’s operation is the efficiency of its operations, which prioritize automation wherever possible. In fact, the head of Mercedes recently noted that while it takes his company 30 hours to assemble a car, Tesla does it in just 10 hours. 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 is really taking it on the chin lately. From the recent stock performance, you would never know that business at the bank is booming and will likely get even better as interest rates likely trend higher. It already had been floundering because of higher cost and still-low net interest income. Then it took another hit as cyclical stocks were hurt in the Omicron selloff. But the prognosis is still excellent for this bank and stock over the next year.” BUY

Veeco Instruments (VECO), recommended by Carl Delfeld in Cabot Explorer, gapped up big four weeks ago after releasing an excellent third-quarter report and has been treading water since. In his update last week, Carl wrote, “This is an American high-quality provider of state-of-the-art semiconductor fabrication equipment. Revenue growth for 2021 may be up 30% and Veeco is growing earnings 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 three weeks ago, has seen its stock pull back in sympathy with all the marijuana stocks, but the good news is that they all 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

The next Cabot Stock of the Week issue will be published on December 13, 2021.