February 22, 2021

The bull market is alive and well, and our holdings, in general, are delivering as expected, with the usual zigs and zags to keep us on our toes.

Today’s recommendation is a big solid technology company that should benefit for years from the ongoing 5G communications rollout—and it pays a nice dividend, too.

As for our current holdings, there are no changes. With the new addition, the portfolio is once again fully invested.

Details inside.

Cabot Stock of the Week 336

The market’s main trend remains up, and thus I continue to recommend that you be heavily invested. With this week’s recommendation, I’m swinging back to the more conservative side with a solid technology company poised for big gains from the 5G communications rollout. The stock was originally recommended by Tom Hutchinson in Cabot Dividend Investor and here are Tom’s latest thoughts.

Broadcom (AVGO)
Broadcom is global infrastructure technology leader and an industry Goliath with $24 billion in annual net revenues. It’s an icon of the technology revolution with roots that trace back over 50 years to the old AT&T/Bell Labs. The company has many category leading products in semiconductors and infrastructure software solutions but essentially provides crucial equipment that enables technology to function as we know it today. It provides components that enable networks to operate together and communicate with each other from the service provider all the way the end user and device.

Broadband, its namesake, is high-capacity transmission using a wide range of frequencies, which enables a large number of messages to be communicated simultaneously. Broadcom products enable it by providing world-leading dominance in networking and wireless connectivity. The confusing AVGO stock symbol is for Avago Technologies which Broadcom acquired in 2016.

Broadcom is a serial acquirer that keeps on top of the latest technology while trimming noncore businesses and thus raising its margins. Avago primarily provides radio frequency filters for smart phones. These filters are crucial technology that enables smart phones to operate efficiently in a congested market by ensuring that transmissions and date streams don’t interfere with one another.

All that may sound complicated. But there are two simple reasons for buying the stock. One, it is benefitting from the current environment as more businesses move online and into cloud-based applications. Two, it will get a huge benefit from the 5G rollout in the short and near term.

In the last reported quarter, wireless revenue soared 43%, primarily because of the launch of the new Apple (AAPL) 5G phones, which require more filters and other networking technology. That boost should continue in the quarters ahead. Longer term, Broadcom will see greater demand as its chips will be an enabling technology behind powerful emerging trends like the internet of things, self-driving cars and artificial intelligence.

Analysts are expecting revenue growth of 10% and earnings growth of 18% for 2021. That’s strong growth for a stock that sells at a below-market multiple of less than 18 times forward earnings. The company is also approaching a huge technological expansion from 5G in the years ahead. Keep in mind that an investment in this stock produced a total return better than 1,800% over the last ten years.

Then there’s the dividend. It’s a huge benefit to have a growth technology company that also pays a dividend. It’s like having a supermodel girlfriend that cooks too. At the current price, AVGO pays a 2.9% yield. That’s solid, especially considering the current low interest rate environment. But the growth potential of the dividend is the main event.

Over the past five years, AVGO grew its payout by a staggering compound annual growth rate (CAGR) of 49%. The annual dividend grew from $1.94 in 2015 to $14.40 at the current rate. The yield-on-cost of an initial investment in the stock five years ago would now be 10.8%. The company has room for future growth as the payout is still only about 48% of free cash flow.

Demand for products in cellular connectivity, networking and data centers is sharply on the rise and should continue to grow for some time. Broadcom is the one of the best in the business at providing the products that enable such things. More and more devices will need to connect to the internet and interact with each other as new 5G technology launches technological innovation and the digital economy to another level.

The timing seems great for AVGO, and the price is still reasonable. As the pandemic eventually fades away, 5G is likely to be a big story in the market. And Broadcom is a primary beneficiary. The stock is a great way for more conservative investors to play in the technology sandbox while getting a growing dividend.

Current Recommendations

Overall, our holdings continue to perform very well, so I have no recommended sales today; the portfolio is full with 20 stocks. But your portfolio may be different. Perhaps you’re overweighted in one of the big winners and should consider partial profit-taking. Perhaps you bought a stock late and now have a loss that’s growing uncomfortably large. Every portfolio is different, and every investor has different goals and levels of risk tolerance, so after you read my comments—and the comments of the analysts who originally recommended each stock—take time to consider the appropriate action for your own portfolio. Details below.

Changes
None

Arcosa (ACA), originally recommended by Tyler Laundon in Cabot Early Opportunities, provides infrastructure-related products and services across North America and has been growing revenues in the high-teens rate in recent quarters. The company is due to report earnings on February 25, and the stock is still a little high, so I’ll keep it rated Hold for now. HOLD.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor, bounced strongly off support at 50 last week so the chart looks fine. In his update last week, in the midst of the rebound, Tom wrote, “Brookfield has had a rough February, down about 6% for the month. The only real news was an offer to buy Canadian midstream energy company Inter Pipeline for about $3.6 billion. Inter scoffed at the offer as too low and nothing has yet gone through. It’s a smart time to buy this company on the cheap after a recession. The market is likely reacting negatively to the company rejecting the offer on fears that Brookfield will end up paying too much. It’s most likely that Brookfield either gets a very good price or the deal blows up. Either way the partnership should be in good shape over the rest of this year. Earnings should be on the rise as new acquisitions come on line and energy and transportation assets return to normal with a full recovery.” BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, has paused in its rally to build a little base at 50. In his latest update, Bruce wrote, “Full-year 2021 guidance is for organic revenue growth of 7%-8% and adjusted earnings per-share growth of 9%-12%. This could well be conservative, particularly if the reopening is strong this summer. The company alerted investors to a potential $12 billion settlement for its outstanding tax matter. This is a worst-case scenario and much higher than our initial estimate, but we see little chance of a final loss this large. Coke repaid about $11 billion in debt from cash on hand and will likely continue to generate robust free cash flow in 2021. The stock has about 27% upside to our 64 price target. While the valuation is not statistically cheap, at 23.6x estimated 2021 earnings of $2.14 and 21.8x estimated 2022 earnings of $2.32 (both estimates ticked up in the past week), the shares are undervalued while also offering an attractive 3.2% dividend yield.” BUY.

CrowdStrike (CRWD), originally recommended in Cabot Growth Investor by Mike Cintolo, hit another new high last Tuesday and has pulled back minimally since. In his update last week, Mike wrote, “CRWD hit some resistance near 250 and has wobbled with the market during the past couple of days. But overall, it (and, encouragingly, most of its cybersecurity peers) remains in fine shape. As with most stocks, further near-term dips are possible, but the main trend here is up, and the outlook for the firm’s Falcon platform is fantastic; just today the firm announced a small-ish acquisition ($400 million) that will boost Falcon’s detection and response capabilities through better data ingestion.” BUY.

Elastic (ESTC), originally recommended by Mike Cintolo in Cabot Top Ten Trader, bounced off its 50-day moving average last week but remains in a clear uptrend. Mike has sold the stock in Cabot Top Ten Trader, taking a quick profit, but I’m sticking with it for now. The company will announce quarterly results Wednesday, February 24, after the market close. HOLD.

ElectraMeccanica Vehicles (SOLO), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer and featured here last week, is now our largest loser, as the stock has pulled back a little more since then. But high volatility is to be expected from such a stock, so if you haven’t bought yet, you can still buy here. In his update last week, Carl wrote, “Shares drifted lower over the last week as the company announced the expansion of its retail footprint into seven additional locations including its first venues in Colorado and Washington as well as additional locations in California, Arizona and Oregon. The company will then have a total of 20 locations in 10 major metropolitan areas in five states in the western U.S. Like many electric vehicle plays, this stock is ahead of the fundamentals, which is why I have recommended taking some profits. This is a speculative idea that will attract some serious media attention in 2021.” BUY.

General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, has pulled back slightly since releasing a positive quarterly report two weeks ago, but the main trend is clearly up. In his update last week, Bruce wrote, “The company’s forward guidance for full-year 2021 adjusted earnings of between $4.50 and $5.25, however, was weaker than the consensus estimate of $6.04 – a shortfall of about 19%. Most of the reduction is due to the computer chip shortage that will require the company to curtail production in vehicles other than its highly profitable full-sized pickup trucks. We think some of the profit reduction is also due to higher prices GM will pay to secure its chip supplies. GM shares slipped 4% in the past week on the weaker near-term outlook. We see fair value at 62, so the shares have about 16% upside to our target price. On a P/E basis, the shares trade at 8.5x estimated calendar 2022 earnings of $6.33.” HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, remains a long-term hold, as I think growth prospects are great for the largest operator of hotels in China. After treading water for roughly three years, the stock broke out to new highs in November, pulled back to catch its breath, and over the past month has hit several record highs. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, has stabilized since gapping down two weeks ago after the company released its fourth quarter report. In his update last week, Bruce wrote, “The company had reasonable performance in the United States, which produces about two-thirds of its revenues. There, its branded sales grew about 2%, helped by stronger pricing. Outside of the U.S., sales were weak, with Europe revenues declining 39% on a constant-currency basis. The renewed lockdowns in the United Kingdom and elsewhere pulled down on-premise sales which constitute the bulk of European revenues. Underlying EBITDA profits fell by 33%. Lower pricing in Europe plus higher aluminum can and transportation costs, combined with higher marketing spending, more than offset some price increases in the United States. On-premise sales carry higher margins, so fewer pub visits mean more profit pressure. Cash flow was sturdy, and the company paid down about $1 billion in debt for all of 2020 – in a pandemic year, we’re OK with that. The cash balance remains healthy and Molson Coors retains its investment grade credit rating. Guidance for 2021 was for essentially a repeat of 2020, with a 5% revenue increase producing unchanged EBITDA. We’re surprised at this, given the strong likelihood of the economic reopening and the benefit to profit from higher volumes. We expect management is being very conservative in this guidance. TAP shares have about 34% upside to our 59 price target. The shares are incrementally more attractive because of the price drop, not less. We see no change in the company’s longer-term prospects regardless of the earnings report, and now have a chance to buy more shares at a lower price. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 8.3x current year estimates, among the lowest valuations in the consumer staples group and well below other brewing companies.” HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, pulled back sharply last week but volume was normal so the main uptrend is still intact. In last week’s update, Tom wrote, “NextEra offers the excitement and growth of alternative energy along with the comfort of a utility. That’s the right stuff for investors. It pulled back recently after a big surge, but that’s normal. The chart is a thing of beauty. And I don’t see any reason why this stock won’t continue its charmed existence. Alternative energy is a big hit with investors and the attraction is likely to grow as the new administration puts more focus on it.” HOLD.

Nuance Communications (NUAN), originally recommended by Tyler Laundon in Cabot Early Opportunities, has just tagged its 50-day moving average after correcting for two weeks but volume on the decline was light so there’s no reason to worry. Long-term prospects for this voice-recognition giant remain excellent. HOLD.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, has been hot, hitting another new high last Tuesday and pulling back minimally since. In his update last week, Mike wrote, “PINS continues to look great, though it’s getting tossed around a bit with the market of late. Day-to-day action aside, though, the stock has the look and feel of a new-ish leader whose growth story should have legs as online advertisers look for places to exploit beyond just Facebook and Google; the fact that Microsoft was interested in buying Pinterest recently only adds to the positive investor perception. If you own some, sit tight, and if you don’t, we’re OK starting small here or (preferably) on some further weakness.” Additionally, Mike featured the stock in Cabot Top Ten Trader last Tuesday, writing, “The stay-at-home trend has caused an explosion of interest in personal projects like recipes, crafting and home décor instructions. One of the biggest go-to sites for collecting these inspirational ideas is Pinterest, a social media platform that features a series of “pins” on virtual “boards” on an unlimited range of topics and often accompanied by web links, pictures, animated gifs and instructional videos. Shares of Pinterest rallied last week when the Financial Times said Microsoft was interested in buying the company (though talks are reportedly “currently not active”). But an even bigger reason for the recent strength was Pinterest’s stellar earnings report. In Q4, the company registered a consensus-beating top line of $705 million (up 76%), driven by strong holiday advertiser demand and positive returns from ad-based products and international expansion. Full year 2020 revenue grew 48% year over year to $1.7 billion. Moreover, the bottom line of $294 million nearly quadrupled, as per-share earnings rose to 43 cents, from 12 cents a year ago. User engagement also improved, with the monthly active user base rising 37% to 459 million, while average revenue per user of $1.57 was up 29%. Management fully expects the positive momentum to continue, guiding for Q1 sales growth in the low 70% range. Analysts agree and expect Q2 revenue to expand by an even more imposing 92%. Further out, the firm plans to deliver more video-based content for users, while enhancing performance metrics for advertisers and increasing its sales umbrella by making the platform more “shoppable.” Given Pinterest’s broadening appeal to creators—and increasing attractiveness to advertisers—the growth runway is huge.” I’m keeping it on hold until we see a better buying opportunity. HOLD.

Progyny (PGNY), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here two weeks ago, remains very strong, with the potential to close at a new high today. Fourth quarter results of the fertility benefits provider will be released after the market close on February 24. BUY.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, hit a record high last Tuesday and remains very strong today. In his latest update, Carl wrote, “Year-to-date, the shares have gone from 196 to 268 and the stock is up five-fold from its March 2020 low. The company’s net loss in the first quarter of 2020 was $0.52 per share. But total adjusted revenue was up 58% year over year. A key question is whether Sea can replicate this growth in Latin America and India.” HOLD.

Spotify (SPOT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, blasted out to a record high today (a reminder that pulling back to a 50-day moving average, which SPOT did three weeks ago, is often the precursor to a move to new highs). HOLD.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been pulling back for a month, and today’s dip below the 50-day moving average may well be the end of the move, given that volume on the pullback has been light. Still, I don’t think it’s a great buying opportunity. TSLA is too popular now, so the best I can rate it is Hold. Tesla sold 80% of the electric vehicles in the U.S. last year and every competitor with the cash to invest in EV production is now gunning to get some of that growing segment. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, has pulled back modestly from its record high of two weeks ago, so technically it looks great. But I’m still worried that the sector as a whole may have peaked back then, as the charts showed some island reversals and there’s been no real buying pressure—and the Canadian stocks in particular look like toast. If you haven’t taken partial profits yet, it’s not too late. I’ll just keep it simple and hold. HOLD.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, made headline news last week when a U.K. court ruled that its drivers were employees. But the stock hardly blinked—so what I see is a buying opportunity at the 25-day moving average. In last week’s update Mike wrote, “UBER has pulled in a few points since its quarterly report last week, which makes sense; the Q4 report wasn’t great and the market has hiccupped since then. But we still think the story (big recovery in Rides this year, with huge secular growth in the Delivery segment) is intact, and the stock looks fine to us—the low 60s might be a near-term ceiling, but we think this dip looks buyable if you’re not yet in. (We’d note that Cabot Options Trader’s Jacob Mintz has picked up on some big call buying in UBER this week; we don’t trade on that but it backs up the view some big investors view this as a buyable dip.) BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, soared from 30 in mid-January to 60 at the start of February and it’s now back to 48—with lower prices certainly a possibility as the froth comes out the stock. In fact, the 50-day moving average is way down at 37. In his latest update, Carl wrote, “Shares have more than doubled so far in 2021 and we are up 7X since we added the stock to the Explorer portfolio. We recently sold a half position and will let the remaining half position ride. The stock may very well be ahead of itself. On the positive side, publicly traded companies in the space sector are limited and there are three ETFs being planned for this sector, which will clearly generate demand. Given all the uncertainty regarding the timing of tests and then the launch of the spaceplanes, I will keep this stock a hold but you should feel free to sell some shares based on your time horizon and risk tolerance.” HOLD.

The next Cabot Stock of the Week issue will be published on March 1, 2021.

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