The past week’s rally has lifted all the stocks in our portfolio (in fact, two have hit recent highs!) and thus I have no sell ratings today. But I do think caution is still important, as the market’s main trend is now down.
Holding some cash is advisable, but there are definitely overlooked bargains out there, and I think today’s recommendation is one of them.
With the broad market still weak, I’m continuing to favor stocks that present lower risk because they are either undervalued, on a big correction, at support or generally under-recognized. Today’s stock is under-recognized because it’s small and relatively new—and it’s on a big correction and sitting at support for reasons you will read about below. The stock was originally recommended by Tyler Laundon in Cabot Early Opportunities, and here are Tyler’s latest thoughts.
TaskUs is a founder-led company that provides customer support and customer experience (CX) services to “new economy” companies. This client base features high-growth, digital-first business models and includes Zoom (ZM), Uber (UBER), Netflix (NFLX), Coinbase (COIN), DoorDash (DASH) and Meta Platform’s (FB) Instagram, among others.
The company is focused on delivering services around customer care, content moderation/security, and data labeling and annotation services. This is a mix of basic services and quite sophisticated work that, in aggregate, allows TaskUs to grow with clients by taking on incremental work volumes as their businesses scale up. Clients are attracted to TaskUs because, like them, the company was born on the web and has grown up in the cloud. There is no legacy software code to work around. This cultural similarity is a large part of what sets TaskUs apart from other providers of IT services.
The company is also differentiated by its ability to get new projects going quickly. This ties back to the efficiency of modern technology solutions. Management says TaskUs employees are very quick to get integrated and start working on customer accounts (roughly three-times faster than the competition).
As a leader in the industry, TaskUs has a hiring advantage as well. The company is able to charge a higher rate than competitors. This means more flexibility when looking to bring additional staff on board.
One challenge has been geographic reach, which has impacted win rates in recent quarters (that said, the 56% win rate in 2020 was still high). On that note, management announced late in 2021 that TaskUs would expand into Poland, Romania and Malaysia. This is expected to help the company win business with both existing and new clients as there is something of an offshoring trend going on in tech.
Finally, there is potential TaskUs could juice the company’s growth rate through tactical acquisitions. With a pullback in valuations, I suspect the M&A team has probably dialed up their work. On the flipside, I wouldn’t rule out a tie-up that sees TaskUs going with a larger company that’s executed well over the years. Accenture (ACN) comes to mind. That’s all speculation though. For now, we should plan on TaskUs delivering organic revenue growth of around 57% ($750 million) in 2021. Adjusted EPS should be around $1.24 (up 103%).
Looking into 2022, analysts expect revenue will rise 28% to $960 million and adjusted EPS will be up modestly, to $1.30. There should be upside to those numbers once the Q4 report is in (expected February 28).
On a final note, a couple of weeks ago, Spruce Point Capital published a short attack on TASK, saying the stock had 50% downside. The report was weak and analysts that follow TASK voiced their confidence in the company’s growth trajectory. Bank of America cited the stock’s growth-adjusted valuation (PEG multiple below 1), which is lower than comparable companies and the S&P 500 despite a much faster growth profile, with profitability. Since then, the stock has pulled back to support at 30 (as growth stocks in general have pulled back), and this may have helped to create a superb buying opportunity.
|TASK||Revenue and Earnings|
|Forward P/E: 20.6||Qtrly Rev||Qtrly Rev Growth||Qtrly EPS||Qtrly EPS Growth|
|Current P/E: NA||($mil)||(vs yr-ago-qtr)||($)||(vs yr-ago-qtr)|
|Profit Margin (latest qtr) -9.5%||Latest quarter||201||64%||0.30||30%|
|Debt Ratio: 59%||One quarter ago||180||57%||0.32||88%|
|Dividend: NA||Two quarters ago||153||49%||0.29||190%|
|Dividend Yield: NA||Three quarters ago||139||38%||0.10||-55%|
Current Recommendations and Changes
|Stock||Date Bought||Price Bought||Yield||Price on 2/7/2022||Profit||Rating|
|Arista Networks (ANET)||1/4/21||139||0.0%||122||Hold|
|Bristol Myers Squibb (BMY)||11/2/21||59||3.3%||66||Buy|
|Brookfield Infrastructure Partners (BIP)||1/12/21||51||3.6%||60||Hold|
|Cisco Systems (CSCO)||7/27/21||55||2.7%||55||Hold|
|Devon Energy (DVN)||12/28/21||45||3.7%||53||Buy|
|Organon & Co. (OGN)||2/1/22||33||3.3%||34||Buy|
|Pioneer Natural Resources (PXD)||1/25/22||210||1.0%||226||Buy|
|Sensata Technologies (ST)||6/15/21||59||0.0%||56||Buy|
|U.S. Bancorp (USB)||9/21/21||57||3.1%||60||Buy|
|Veeco Instruments (VECO)||10/12/21||23||0.0%||27||Buy|
|Verano Holdings (VRNOF)||11/16/21||13||0.0%||12||Buy|
The addition of TASK brings the portfolio to 16 stocks, still well below our full complement of 20, and I do want to keep risk low until we have a truly healthy market again. But thanks to the market’s recent bounce, there are no obvious trouble stocks to sell today, so we’ll sit with 16. Details below.
Changes Since Last Week’s Update
Arista Networks (ANET), previously recommended by Mike Cintolo in Cabot Growth Investor continues to sit in the 120 area, which is good, all things considered. In his update last week, Mike wrote, “ANET has bounced with most things in the past few days, and it’s still a few points above last week’s low even after today’s market-induced dip. Of course, the bounce hasn’t been as sharp as some other names, but that’s not unusual—usually the hardest hit stuff is what bounces the most initially before the sellers return. Right now, ANET certainly isn’t in great shape, but it’s ‘only’ 18% off its highs and all fundamental signs point to good things: While Meta’s (FB) stock plunge was the headline news today, management said its CapEx plans ($29 to $34 billion, up from $19 billion in 2021) were unchanged from its earlier guidance, driven by ‘investments in data centers, servers, network infrastructure and office facilities’—that should be very good news for Arista. We’re not complacent, but with nearly 70% in cash, we think it’s best to hang on. Earnings are due February 14.” HOLD
Bristol Myers Squibb Company (BMY), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Growth/Income Portfolio, is going the right way, and today’s breakout takes it into territory last seen in September! The quarterly report last week saw revenue of $12.0 billion, up 8% from the year before, and eps of $1.83, up 25% from the year before. I’ll relay Bruce’s opinion on the quarter next week, but last week, before the report, he reiterated his price target of 78, writing, “we believe the earning power, low valuation and 3.3% 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, bounced off its 200-day moving average two weeks ago and has now recovered roughly half what it lost in the market’s downturn. In his update last week, Tom wrote, “This legendary technology company stock has been a wild ride of late. It had a big surge in December and then gave it all back and then some during the tech selloff in January. But it’s up 12% over the past week. We’ll see where it settles in the near term. But the prospects are strong for the year as Broadcom continues to benefit from the 5G rollout.” HOLD
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, provides a 3.5% yield with little drama. In his latest update, Tom wrote, “This infrastructure partnership is still not far from the recent high. It is hanging strong in an environment that has been tough for defensive dividend payers. BIP has been on an uptrend since the market bottom in March of 2020, albeit a slow and sometimes choppy one. It still looks solid and earnings should be strong, reflecting the new acquisition. BIP was very resilient when the market was ugly. It’s a great stock to own in a more volatile market. (This security generates a K1 form at tax time).” HOLD
Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, fell through its 200-day moving average two weeks ago and remains there today. In his update last week, Bruce wrote, “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. The company is highly profitable, generates vast cash flow (which it returns to shareholders through dividends and buybacks) and has a very strong balance sheet. CSCO shares have 20% upside to our 66 price target. The dividend yield is an attractive 2.7%.” HOLD
Devon Energy (DVN), originally recommended by Mike Cintolo in Cabot Growth Investor, hit another new high last Friday! In his update last week (before the new high), Mike wrote, “DVN has chopped around a bit in recent days despite very resilient oil prices (in the $87 range) and skyrocketing natural gas prices (near $5 even after today’s sharp drop). As always, those prices are going to move around a lot, and if the market has another leg down, it’s possible economic worries could drag oil prices lower. But anything around up here is going to be a gusher for the industry in general and Devon in particular. The quarterly report is due February 15, as is the Q4 dividend announcement; while we offer no predictions, the fact that oil and natural gas were higher in Q4 vs. Q3 bodes well for a beefy payout. Just as important, though, will be any updated cash flow outlook for 2022, along with any adjustments to its payout and/or share buyback schedule. Back to the stock, potholes are always possible, but DVN looks great, and we still think the huge-volume buying after the dip two weeks ago should lead to higher prices. We’ll stay on Buy, though aim for dips of a couple of points.” BUY
Oracle (ORCL), originally recommended by Carl Delfeld in Cabot Explorer and featured here three weeks ago, bottomed at 80 soon after that and has bounced modestly since. In his latest update, Carl wrote, “Oracle offers us cloud-computing high growth and margins coupled with a reasonable price. More than 1,000 global organizations are using Oracle cloud services that provide organizations with a single point of contact and faster computing speeds as well as reduced overall costs. This allows clients to move critical workloads in weeks, or even days, instead of months. The stock is trading at 16 times forward earnings with a high return of equity. This stock is well suited to the current tough tech stock environment, so I encourage you to buy if you have not already done so.” BUY
Organon & Co. (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, and featured here last week, was spun off from Merck in June 2021 and is a member of the S&P 500—but undervalued by the market according to Bruce. In last week’s update, he wrote, “Investors have ignored the company, but we believe that Organon will produce at least stable and large free cash flows with a reasonable potential for growth. At our initial recommendation, the stock traded at a highly attractive 4x earnings. OGN shares have about 40% upside to our 46 price target. The shares continue to trade at a remarkably low valuation while offering an attractive 3.4% dividend yield.” BUY
Pioneer Natural Resources (PXD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and featured here two weeks ago, hit a new high last Friday. Energy stocks are obviously strong now, but no one knows how long it will last, so we’ll just ride the trend until it ends. BUY
Sensata Technologies (ST), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, was at a record high of 65 just a month ago, but today it’s back down at 55, where the stock has found much support over the past year. In his update last week, Bruce wrote, “Sensata reported reasonable fourth-quarter results, but forward guidance was below the consensus estimates so the stock was moderately weak on the news. In the quarter, adjusted earnings of $0.87/share rose 2% from a year ago and were about 7% above the consensus estimate. Revenues of $935 million rose 3% from a year ago but fell 1% after adjusting out revenues from acquisitions and from currency effects. The revenues were about 2% above the consensus. Revenues were held back by production weakness at automakers but helped by outgrowth (more content per vehicle, including electrification components, such that Sensata revenues grew more than the car industry), growth in industrial demand and acquisitions. The company’s profit margin contracted modestly due to higher labor and input costs along with higher ‘mega-trend’ investments in electrification and other technologies that will help Sensata participate in faster-growing secular trends. Despite full-year 2022 guidance being weaker than analyst estimates, Sensata anticipates reasonably good growth: revenues would increase by about 8% excluding acquisitions and earning per share would increase by 8% ex-currency. Analysts had previously expected 15% earnings per share growth. Guidance was subdued partly due to an anticipated sluggish recovery of 7% growth in global auto production weighed down by China. The company also expects growth to stall in industrial demand and heavy/off-road vehicles. The company continues to generate sizeable amounts of free cash flow while investing in new technologies that are producing meaningful revenues. Sensata’s balance sheet remains healthy and arguably underleveraged, even though the net debt balance increased modestly from a year ago due to its acquisitions and some inventory building. Sensata announced a new $500 million share repurchase program – a good move in our view as the shares are undervalued. ST shares have about 33% upside to our 75 price target.” BUY
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, bounced off its 200-day moving average at 800 two weeks ago after the company reported excellent fourth-quarter results, and the stock has been basing in the 900 area since. Short term, I have no idea where the stock might go next (a lot depends on the broad market), but long term, I still recommend holding for investors with long-term gains. HOLD
U.S. Bancorp (USB), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, sold off two weeks ago after a disappointing quarterly report, but the stock has bounced right back up again, so technically, is still in the trading range between 55 and 60 that’s constrained it since May. In his update last week, Tom wrote, “This regional bank stock caught fire in the first half of January as a steepening yield curve promised to juice profits. But USB gave it all back in the second half of the month as the market turned treacherous. USB also missed slightly on earnings, but the last quarter didn’t incorporate the higher interest rates. The stock has been strong this week and USB should be poised for a strong year as business is solid and should get stronger as interest rates rise.” BUY
Veeco Instruments (VECO), originally recommended by Carl Delfeld in Cabot Explorer, was hitting new highs a few weeks ago and now it’s back at lower end of its uptrending channel. In his update last week, Carl wrote, “VECO shares finished this week flat at 27. This high-quality company makes the equipment and technology essential for staying ahead in the chip fabrication game, a business with technological and high capital barriers to entry which leads to high margins and return on equity. Veeco is a solid company with a sterling balance sheet. I recommend that you acquire shares if you have not already done so.” BUY
Verano Holdings (VRNOF), recommended by yours truly in Cabot SX Cannabis Advisor, bottomed with the entire cannabis sector late last year, and has been building an increasingly long (and hopefully strong) base at 10, where it has found support since October. Last week the company announced the acquisition of Goodness Growth Holdings, a privately held company, for roughly $413 million cash. The acquisition, which includes one of ten vertically integrated licenses and four active dispensaries in New York and one of two vertically integrated licenses and eight active dispensaries in Minnesota, also brings assets in New Mexico, Maryland and Arizona. If you’re underinvested in marijuana stocks, you could buy here. BUY
Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is once again trading above all its moving averages, thanks to an excellent quarterly report. In his update last week, Tom wrote, “Wow! The card company stock had been languishing in the troubled market. But it reported blowout earnings last week and the stock jumped over 10% on the day of the report and is now up over 16% in a little over a week. As anticipated, international business is picking up as are the very profitable cross-border transactions as travel returns. The stock should continue to have a good year as the company benefits from a fuller recovery in 2022.” BUY
The next Cabot Stock of the Week issue will be published on February 14, 2022.