February 1, 2021

The market’s main trend remains up, and thus I continue to recommend that you be heavily invested.

However, last week’s GameStop affair has increased the risk of a well-deserved major correction and thus for the second week in a row, I’m recommending a slightly conservative stock with less downside potential—and a small dividend.

As for our current holdings, there are no obvious bad apples, but we must sell something to keep the portfolio a proper size and the victim today is our Brazilian Water company SABESP (SBS).

Details inside.

Cabot Stock of the Week 333

The market’s main trend remains up, and thus I continue to recommend that you be heavily invested. However, because the “froth” that I mentioned a week ago grew to extreme proportions in the GameStop affair, and there is now an even greater chance that the market as a whole and growth stocks in particular will embark on a major correction, this week I am again recommending a lower-profile stock that is less likely to lose much ground in such a correction. The stock was originally recommended by Tyler Laundon in Cabot Early Opportunities and here are Tyler’s latest thoughts.

Arcosa (ACA)
Investors who are looking for a modestly conservative stock with both growth and value attributes should take a closer look at Arcosa.

The company, which has a market cap of around $2.7 billion, caught my eye because of its end market exposure to infrastructure and clean energy, both of which should be strong markets in a recovering economy. I’m also impressed by the strength Arcosa’s stock has shown since it spun off from Trinity Industries (TRN) in November 2018, and I like that the small cap stock generates huge EPS numbers.

What does it do?

Arcosa provides infrastructure-related products and solutions to the construction, energy and transportation markets in North America. Growth should be strong in the years ahead as the U.S. seeks to replace and improve its aging transportation and energy infrastructure, while growing the mix of clean and renewable power generation.

Arcosa’s biggest segment (46% of revenue) is Energy Equipment, which makes wind towers, steel storage tanks (for propane, ammonia, etc.) and electric utility structures.

The Construction Projects segment (28% of revenue) supplies a variety of aggregates (sand, gravel, limestone), specialty materials (lightweight aggregates for roads, bridges, green buildings, etc.) and steel and aluminum trench shoring and shielding equipment (for protecting in-ground construction/utility-related holes and trenches from collapsing).

Finally, the Transportation Products segment (26% of revenue) makes barges and marine hardware, as well as products for railroads (railcar coupling devices, axles, etc.).

Since the 2018 spin-off from Trinity, Arcosa’s management team has executed on its growth plan across all three divisions. It has completed growth-oriented acquisitions, added new product lines, expanded manufacturing capacity and geographic reach, and managed to grow profit margins.

Even with the pandemic, revenue over the last twelve months (ending September 2020) was up 11%. Analysts see full-year 2020 revenue up by 12%, to $1.9 billion while adjusted EPS should be up 7%, to $2.52. Arcosa pays a small dividend of $0.20 per year, equal to a yield of 0.3%.

In the near term I expect Arcosa to focus on its construction and energy divisions, with projects related to the 5G telecom buildout and renewable power distribution making headlines.

On the flip side, the transportation products business may deliver mixed results as higher demand for certain things (like grain) is offset by lower demand for others (crude oil and refined products).

Add it all up and analysts currently see growth in 2021 being flat on both the top and bottom lines. That likely reflects conservative estimates as there isn’t a lot of good news baked into the current stock price. This is a story that, over the next couple of years, should go from mediocre to good, and possibly even to great. Both of those scenarios should translate to significant capital gains.

Finally, I suspect that with the new administration focused on getting the economy going again, a (hopefully) easing pandemic, and access to low-cost financing, Arcosa will be relatively aggressive in pursuing growth opportunities. That could bump up growth estimates as we move further into 2021 while also bringing bigger investors into the stock.

ACA came public in November 2018 when it was spun out of Trinity Industries near 26. While there were some dips, the stock did well and was trading near 48 in February 2020 just before the pandemic hit. ACA bottomed at 28. The recovery began with fits and starts but smoothed out last summer and ACA reached its pre-pandemic high by early September.

There have continued to be some surges and dips since, and ACA has mostly held above its 50-day line. The occasional retreats have been in the -7% to -14% range. With ACA currently trading 11% below the all-time high of 64, which was recorded on January 14, it appears the window of opportunity to start new positions is open. The estimated Q4 2020 earnings date is on February 26.

Current Recommendations

Overall, our holdings continue to perform very well, with no obvious sell candidates—though last week I did send out a bulletin suggesting partial profit-taking in Virgin Galactic (SPCE). Still, the addition of ACA means we need to sell something to stay at or under our cap of 20 stocks, and the victim today is SABESP (SBS). Details below.

Changes
Pinterest (PINS) to Hold
SABESP (SBS) to Sell
Uber (UBER) to Hold

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor, hit another record high last Monday and has pulled back normally since. In his update last week, Tom wrote, “This infrastructure partnership stock has basically been in a slow slog higher since March. It just recently made new highs but is still reasonably valued. The future looks bright too as recent acquisitions will boost earnings, its transportation assets recover with the economy, and the infrastructure subsector becomes increasingly in vogue as the pandemic fades and the new Administration focuses more on infrastructure spending.” BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, continues to build a bottom, sitting right on top of its 200-day moving average—so technically it’s attractive. Fundamentally, here’s what Bruce wrote in last week’s update: “While near-term outlook is clouded by pandemic-related stay-at-home restrictions, secular trends away from sugary sodas, high exposure to foreign currencies (now perhaps a positive) and always-aggressive competition, Coca-Cola’s longer-term picture looks bright. Coca-Cola is supported by over $21 billion in cash which offsets much of its $53 billion in debt. Its growth investing, debt service and $0.41/share quarterly dividend are well-covered by free cash flow. The stock has about 30% upside to our 64 price target. While the valuation is not statistically cheap, at 23.4x estimated 2021 earnings of $2.10 and 21.4x estimated 2022 earnings of $2.29 (both estimates unchanged in the past week), the shares are undervalued while also offering an attractive 3.3% dividend yield.” BUY.

Columbia Sportswear (COLM) originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, has pulled back over the past couple of weeks, but the correction was halted last week at the 50-day moving average, so the uptrend is intact. In his update last week, Bruce wrote, “After a disappointing third quarter, after which the stock fell sharply, as price-sensitive investors we raised COLM shares back to a Buy. We think the company low-balled its guidance, with its long-term earnings power impeded but pushed out into the future. It also announced personnel changes in several key operational roles. Columbia hired a senior Nike executive to run its U.S. sales group. Earlier this year a top Starbucks executive was added to Columbia’s board of directors, the chief operating officer stepped down (no replacement yet), the senior Americas manager was installed as the full-time head of omni-channel (a new position) and the chief digital officer role was created. Other executives received title promotions, yet their roles remain the same. This shake-up suggests that the third quarter blunder had deeper roots and that the company is actively working to get back on the right track. Columbia shares have about 11% upside to our 100 price target. Valuation is 24.6x estimated 2021 earnings of $3.67 (estimate unchanged from last week). On 2022 estimated earnings of $4.64 (unchanged), the valuation is a more reasonable 19.5x. For comparison, the company earned $4.83/share in 2019.” HOLD.

CrowdStrike (CRWD), originally recommended in Cabot Growth Investor by Mike Cintolo, found support at 200 last week (well before it fell to its 200-day moving average) so the uptrend is intact. In last week’s update, Mike wrote, “CRWD got off to a great start for us, but thankfully we held off averaging up as the stock quickly became extended on the upside—and we’ve seen the result this week, with a big air pocket (down more than 30 points in less than three days!) before finding solid support. Despite the nauseating drop, we actually think the stock looks decent here—it tagged (and held) its 10-week line during Wednesday morning’s fall, and volume has been much lower than the three big buying weeks in December. Throw in a growth story that has years of runway ahead of it (and a chart that only decisively got going from a big IPO base last August) and we continue to see CRWD as relatively rare merchandise that big investors will accumulate for a long time to come. Frankly, if the stock (and growth stocks as a whole) can stabilize, we wouldn’t be opposed to filling out our position soon, but we’ll see how it goes. If you don’t own any, we’re OK starting a half position here and using a reasonable (12% or so) loss limit.” BUY.

Elastic (ESTC), originally recommended by Mike Cintolo in Cabot Top Ten Trader, also pulled back last week but found support above its 50-day moving average, so it still looks good to me. Mike, however, tends to trade faster in Cabot Top Ten Trader, and he did recommend selling last Friday. Thus, you could follow Mike and take the small profit, or hold on with me and aim for bigger gains. HOLD.

General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, was hitting record highs two weeks ago and has pulled back normally since, though the stock remains well above its 50-day moving average. In his update last week, Bruce wrote, “President Biden has vowed to replace the U.S. Government’s fleet of 650,000 vehicles with American-made electric vehicles. While the idea makes great headlines and would be a huge boost to GM (along with Ford, Tesla and Chrysler), we see its execution as unlikely and slow. The price tag of perhaps $33 billion (assuming just over $50,000/vehicle) is enormous even in an era when trillions of dollars are tossed around like nickels. It’s not clear if this volume of EVs could even be produced or how they would be recharged and maintained. One emerging near-term risk (and perhaps mid-term risk as well) is the growing shortage of semiconductor chips. Surging global demand and Covid-induced output reductions are behind the shortage. Many car makers, including GM, Volkswagen, Chrysler, Honda and others, have trimmed their production volumes due to shortages. On a P/E basis, the shares trade at 8.7x estimated calendar 2021 earnings of $6.03 (up about four cents this past week). We see fair value at 62, so the shares have about 18% upside to our target price.” HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, is China’s largest hotel operator, with 6,507 hotels and 637,087 hotel rooms in operation in 16 countries—and we’re in it for the long haul, as the long-term prospects are great. Right now, the stock is in an uptrend, riding its 50-day moving average higher. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, hit another record high last Wednesday and has pulled back normally since. In his update last week, Bruce wrote, “MolsonCoors announced a partnership to distribute Superbird, a premium ready-to-drink tequila-based cocktail. It is the company’s first move into the premium RTD category and suggests incremental progress toward its expansion efforts. TAP shares trade at 12.4x estimated 2021 earnings of $4.21. This valuation is low, although not the stunning bargain from a few months ago. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 8.7 current year estimates, among the lowest valuations in the consumer staples group and well below other brewing companies. TAP shares have about 13% upside to our 59 price target.” BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, hit another record high last Monday and is now roughly halfway back to its 50-day moving average—though there’s no reason to believe it will get there quickly, especially in the current pro-renewable energy climate. In last week’s update, Tom wrote, “The combination regulated and alternative energy utility announced fourth quarter results that beat estimates. The company grew adjusted earnings per share 11.1% for the quarter and 10.5% for 2020. Earnings were largely driven by the alternative energy business which grew earnings by 15% for the year. Future earnings growth is likely to be driven by a sizable backlog of alternative energy projects. The utility guided to 7% overall growth for 2021. The stock has pulled back 4% so far today, albeit in a down day. It’s mostly just selling on the news. I don’t see any reason for negativity in the report. If there is further weakness, I will raise the stock to a BUY.” HOLD.

Nuance Communications (NUAN), originally recommended by Tyler Laundon in Cabot Early Opportunities, bounced off its 50-day moving average last Wednesday and thus its uptrend remains intact. Long-term prospects for this voice-recognition giant are excellent. HOLD.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, has really flattened out since early December, with the result that its 50-day moving average has caught up. Still, Mike isn’t giving up. Last week he wrote, “We decided to trim our Pinterest position a bit in yesterday’s special bulletin (selling one-fourth of our remaining shares), as the combination of the souring growth stock environment along with this stock’s own action (no progress for many weeks, lots of sloppy action lately) told us the buyers were losing power—and indeed, on Wednesday, the stock gapped below its 50-day line. Thinking about some potential scenarios, one (bullish) possibility is that this sharp shakeout is what PINS needed to get rid of the weak hands and pave the way for its next upmove. Still, we need to see that to believe it; until some strong buying appears, it looks like PINS needs more time to consolidate its massive prior move (40 to 75) from September through mid-December. A big key will obviously be earnings, which are due out in a couple of weeks (February 4). In the meantime, we’re content to hold the rest of our position with a loose stop (somewhere in the low 50s for now).” I’ll downgrade to Hold. HOLD.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor and now recommended by Tom Hutchinson in Cabot Dividend Investor, nearly tagged its 50-day moving average at last Wednesday’s low but now it’s on the rise again. In his update last week, Tom wrote, “Despite the 100% return in the position so far, I don’t think the party is over. Qualcomm is a primary beneficiary of the 5G rollout as it currently has the only 5G smart phone chip and other important supporting technologies. It’s going to ring that register big time as the royalties flood in over the next year plus. It’s also likely that 5G becomes a market driver in 2021 as the pandemic finally fades.” HOLD.

SABESP (SBS), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, doesn’t look terrible. But it’s showing no signs of life either, just sitting between 7 and 8 waiting for buyers to appear. In Carl’s update last week, he wrote, “Shares went sideways again this week and I have lost patience with this stock. Despite its monopoly power and low valuation, I’m moving this company to a Sell.” I haven’t lost patience, but given that this is our biggest loss, I have no problem choosing it as the stock to eject form the portfolio today. SELL.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, pulled back sharply with the market last week but this morning the buyers gapped it up and reversed all the damage! In his update last week, Carl wrote, “Sea is Southeast Asia’s biggest gaming, e-commerce and payments firm with more 40 million daily active users in a region populated by 655 million tech savvy consumers. Sea’s strategy so far is relying on its gaming group Garena to generate sufficient cash to fund surging growth in its e-commerce and digital financial services segment. Shopee, the e-commerce arm of Sea, is scaling up its operations in Brazil and evaluating the long-term potential of Latin American markets. The Singapore-headquartered technology group’s shares surged more than 400% in 2020. Another growth driver with huge potential is SeaMoney, a digital payments platform that ties together its gaming and commerce segments. I’m maintaining a hold rating on the stock but feel free to take some profits as the stock is struggling a bit to regain momentum in 2021.” HOLD.

Spotify (SPOT), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here two weeks ago, was bought as the stock dipped toward its 50-day moving average, so we had a decent entry point. But after rallying for a few days, the stock again came under pressure last week and now sits right on its moving average. Aggressive investors can still buy here. If Netflix is the king of video streaming (though obviously there’s competition), Spotify is the king of audio streaming. BUY.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has pulled back minimally from the record high it hit last week, but still remains quite elevated—and expensive. Traders could cash in some partial profits here, but long-term investors can hold. Tesla still has great growth potential, and may even see its energy business exceed its automotive business someday! HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, continues to pull back from the record high it hit three weeks ago. Last week in my update I wrote, “The biggest seller of marijuana in Florida, with a 52% market share and a record of profitability since 2017, Trulieve is a well-managed company with excellent prospects as it expands into other states (California, Massachusetts, Connecticut, Pennsylvania and West Virginia). And today it announced the opening of its 78^thdispensary, located in Sebastian, Florida. Revenues are the slowest-growing among the industry leaders (Q3 saw $136 million, up “only” 93% from the year before), but that record of profitability is impressive. Analysts are looking for EPS of $1.24 in 2021, up from an estimated $0.47 in 2020. As for the stock, it gained 180% from its September low to its record high two weeks ago, and is now on a normal correction.” HOLD.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, remains stuck just slightly below its 50-day moving average, but success may still come if we’re patient. In last week’s update Mike wrote, “Two weeks ago Uber looked about as good as can be, but things have changed—it began with some wobbles after Softbank started to unload some shares, and the selling accelerated during the market’s latest wobbles, with shares briefly diving to two-month lows yesterday before today’s strong, encouraging snapback. Overall, UBER’s dramatic year-long breakout (which was a big reason we bought in the first place) is very much intact, so we’ll give shares a chance to find their footing, though with a cost basis just above 51, we don’t want to absorb too much of a loss. We advise holding, but we also have a relatively tight mental stop (47 to 48 area) in the case the selling continues.” I’ll downgrade to Hold. HOLD.

Xcel Energy (XEL), originally recommended by Tom Hutchinson for his Safe Income Tier, and featured here last week, is a little lower today and that just makes it a better buy. In his update last week, Tom wrote, “This smaller and more volatile alternative energy utility is near the low point in a pattern that moves up and down on a longer-term uptrend. It’s been struggling of late as investors focus on other things. Fourth quarter earnings will be announced tomorrow and we will see if the recent weakness is normal volatility or is something more based on fundamentals.” BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, was our most volatile stock of the past week (happily on the upside). Part of the reason was the announcement of a new ETF that will focus on space stocks, but the bigger reason was the buying of social media-inspired Robinhood traders targeting heavily shorted stocks. I recommended taking partial profits on Wednesday, while Carl on Thursday recommended selling half and Tyler, who has also recommended the stock, recommended selling a fourth to a half. Long term, of course, the future is bright. HOLD.

The next Cabot Stock of the Week issue will be published on February 8, 2021.

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