January 10, 2022

Note: Because of the Martin Luther King, Jr., holiday, next week’s issue will be published on Tuesday, January 18.

While the S&P 500 hit a record high just last week, the market is being hit hard today, and thus I have two sell recommendations, AMBA and FND.

But I also have a new recommendation, which has the potential to be a big winner as the world increasingly values what this little company produces.

Details inside.

New Recommendation

While the S&P 500 hit a new high just last week, the broad market has been less healthy for months, with growth stocks in particular hit by a few waves of selling. Further downside is certainly possible, but if there is a real downtrend, today’s stock could be that rare stock that bucks the trend. It’s small and unproven, but it’s got a great story, and here’s how Tyler Laundon, who first recommended the stock in Cabot Early Opportunities, explains it.

MP Materials Corp (MP)
MP Materials owns Mountain Pass, the only rare earth mining and processing facility of meaningful size in the Western Hemisphere. It currently produces 15% of globally available rare earth concentrates. Mountain Pass is based in California, while MP Materials is headquartered in Las Vegas, NV.

Rare earths are essential commodities for manufacturing the permanent magnets that are critical components in green technologies. These include electric vehicles (EVs), offshore wind turbines, drones and robots. The key ingredient is neodymium-praseodymium (NdPr), which is what Mountain Pass is chock full of.

While rare earths aren’t exactly “rare” – they are abundant in the earth’s crust – finding them in high-grade deposits where they are economical to mine is very rare indeed, especially outside of China (where roughly 60% of production comes from).

Mountain Pass has high-grade deposits. Moreover, MP Materials has what appears to be a viable plan to transition from a producer of rare earth concentrates (which it is now) to a producer of higher-value separated rare earth oxides (a multi-year plan).

This plan should allow MP Materials to produce at higher scale and with lower costs relative to other producers. In fact, analysts think Mountain Pass will be the lowest-cost rare earth producer in the world.

The company’s assets were acquired from the now defunct Molycorp (went bankrupt in 2017). Those assets reflected the $1.7 billion investment to get through Stage 1 of development, which involved building an open pit mine and crushing, milling and flotation facilities. Those are all operating now.

MP is currently working to achieve Stage 2 optimization – the restart of existing but idled separation and related facilities. This stage is expected to be done in 2022 at a cost of $220 million.

Phase 3 involves the downstream expansion, i.e., making the rare earth magnets that will feed the EV supply chain. Just a few weeks ago, management announced the formal beginning of this phase with its plan to build a rare earth metal, alloy and NdFeB magnet manufacturing facility in Fort Worth, TX. Production of 1,000 tonnes (t) annually is seen beginning in 2023, two years earlier than previously expected.

While General Motors (GM) was announced as the first customer (with a binding, long-term supply agreement) we don’t know much more about this facility, other than that management said the plan is to make it as small as possible but still be economically viable. The implication is that it should cost less than MP’s currently available cash balance ($457 million as of September 30).

Because of the reserves in Mountain Pass and the strategic importance of securing rare earth supplies outside of China, MP Materials is considered somewhat crucial to the domestic supply of rare earths. It’s not out of the question that the company could partner with an EV manufacturer that wants to secure critical materials. An outright acquisition of MP Materials shouldn’t be ruled out either.

MP came public via SPAC IPO on November 17, 2020. The stock closed at 14.4 that day then rallied for the next month, closing at 40.7 on December 22. After a 30% correction shares rallied again to close at their all-time high of 51.8 on March 2.

MP fell back in the spring of 2021 and spent most of the summer and fall months trading between 30 and 40. Shares then broke out above 40 following the November 4 earnings report and have traded as high as 53 since (intra-day).

With resistance at the 50 level, support at the 40 level and a share price near 44 investors can buy MP near the lower bounds of its recent trading range and have well-defined thresholds to get out (break below 40) or confirm a major breakout (jump and close above 50-52).

Tim’s note: Tyler’s readers were advised to buy on December 15 and then advised to sell last week, for a 13.8% gain. The pullback since then provides a new opportunity, for both long-term and short-term investors, including Tyler, who has told me he may recommend it again.

Current Recommendations and Changes

Current Recommendations

Value stocks are now looking stronger than they have in years, with all three of Bruce Kaser’s recommendations from Cabot Undervalued Stocks Advisor acting well. But growth stocks are being hit hard, and the result is that we will sell two today, getting out with small profits. Details below.

Changes Since Last Week’s Update
Ambarella (AMBA) to SELL
Floor & Décor (FND) to SELL
Marvell Technology (MRVL) to HOLD
WillScot Mobile (WSC) 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. But the stock, which had doubled since August, now appears to be in trouble. Last week in Cabot Growth Investor, Mike wrote, “Just about every growth stock has been a bummer of late, but AMBA especially so … and this was despite a solid Investor Day on Tuesday: Management implied that the computer vision chip business should more than double in 2022, while the next generation of its chips were revealed, with terrific performance benchmarks (likely to be priced much higher than current offerings) that should attract even more automakers. However, the firm did guide margins to be a bit lighter than forecasts, and in this environment, that was all that was needed to punish shares. It needs to hold up around here, but after dumping half yesterday, we’ll hold our remaining stake tonight and give it a bit more rope.” That was written Thursday, as the stock had a small up day, but it fell again Friday and is down again today, and that tells me it’s time to exit while we still have a tiny profit left. SELL

Arista Networks (ANET), previously recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, is two weeks off its peak, on a correction that’s taken it just below its 50-day moving average—which could be a great entry point if you haven’t bought yet. In his update last week, Mike wrote, “Frankly, while we’re not in the mood to plow into most anything, we do think ANET is about as decent a setup as you’ll find out there, backed up by a rapid, reliable growth story (analysts keep nudging up their estimates and see 27% earnings growth this year). We’ll stay on Buy, but only if you already have plenty of cash.” BUY

Bristol Myers Squibb Company (BMY), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Growth/Income Portfolio, is one of the strongest stocks in the portfolio! In his update last week, Bruce wrote, “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. 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 26% upside to our 78 price target. Valuation remains remarkably low at 7.9x estimated 2022 earnings, compared to 11x or better for its major peer companies. The stock’s 7.4x EV/EBITDA multiple is similarly cheap, compared to 9-10x or better for peers.” BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has been strong since the stock broke out in early October, and last week brought the start of the stock’s first real correction since then. In his update last week, Tom wrote, “This legendary technology player has been hot stuff since the beginning of October. It’s up over 40% since then … Chip shortages are continuing, and the news has dented semiconductor stocks. But Broadcom has handled the chip shortage remarkably well so far and should continue to do so.” BUY

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 getting the lead out. It just made a new all-time high on Monday and is still within bad-breath distance of that high right now. Recent patterns suggest BIP will continue to move higher for a while before consolidating before the next move higher. It is in a longer-term uptrend and is worth holding through the gyrations, especially with a solid distribution payout. The defensive business and high yield should help BIP perform well on a relative basis in a more sideways new year.” HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, is on a normal correction down to its 25-day moving average, which is likely a decent entry point if you don’t own it. In his update last week, 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. 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 7% upside to our newly increased 66 price target. The shares offer a 2.4% dividend yield.” HOLD

Devon Energy (DVN), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here two weeks ago, hit a new high on Friday and is off a bit today. In his update last week, Mike, wrote, “DVN has been a bright spot, as money rotating into commodity and cyclical names has driven oil stocks higher—and oil prices remain very firm, even approaching the $80 level today, which would result in gushing cash flow from the company. Interestingly, some in the industry are getting more bullish on oil prices, too; Pioneer Natural Resources (PXD), another play in the group, disclosed that it’s dumped all its hedges for 2022; whether they prove right or wrong is anyone’s guess (and to be fair, some of the reduced hedging across the industry is because debt levels are down drastically), but the fact that oil prices are so resilient despite the virus variant and a hawkish Fed is encouraging. Earnings (and the next dividend announcement) will come February 15. We’ll stay on Buy, and we could even average up on DVN going forward, but we prefer to do so after some weakness.” BUY

Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, hasn’t hit a high since the first week of November, and now the stock is in a serious downtrend, having fallen well below its 200-day moving average today. In his update last Thursday, Mike wrote, “FND has been caught up in the selling, though after shaking out below its prior low and 200-day line this morning, it closed right near both today. The stock is right at our stop, but we find it interesting that other home-improvement-related retailers look fine; in our view, the odds of a major deceleration in growth is far lower than the opposite as supply chain issues abate. Long story short, we again have FND on a very tight leash, but we advise holding for now.” Since then, the stock has weakened further and our profit has quickly evaporated, so out it goes. SELL

Marvell Technology (MRVL), originally recommended by Carl Delfeld in Cabot Explorer, last hit a high in early December, and while it had been base-building since then, today the stock fell to its 50-day moving average, and now it’s at risk of closing the gap created after the great third-quarter earnings report. In his update last week, Carl wrote, “A Needham analyst picked Marvell as his #1 semiconductor pick for 2022, with a price target of 115 (it’s currently at 84). It is a great semiconductor play with seven out of the top 10 automotive original equipment manufacturers (OEMs) purchasing Marvell chips; the company is set for a solid growth trajectory in this market.” That’s all very promising, but I’ll downgrade it to hold now, and likely sell if it falls further. HOLD

Sensata Technologies (ST), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, hit a new high last week! 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. ST shares surged 13% in the past two weeks to an all-time high as the market increasingly recognizes the value of the company’s steady earnings growth, healthy margins, solid business franchise and underleveraged balance sheet. The shares have about 15% upside to our 75 price target.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is in the news virtually every day, so is the farthest thing from an undiscovered stock. Yet the long-term prospects for the company are still enormous, so the case for holding remains. And the case for short-term investment remains interesting, too, as the stock again earned a spot in Cabot Top Ten Trader last week, where Mike wrote, “Tesla (covered in the October 18 report) is one of today’s most news- and rumor-driven stocks, and for that reason isn’t our favorite situation. What’s more, some of the news isn’t encouraging, such as its voluntary recall of a half million Model 3 and S sedans; the defect is a minor one, however (rearview camera cable harness may be damaged by the opening and closing of the trunk lid), and Wall Street has taken it in stride. In fact, several institutions raised their price targets based on the new U.S. infrastructure bill, believing it will usher in an era of electric vehicle dominance (due to the bill’s charging station and tax credit support). The company’s growing solar and power storage business, meanwhile, both increased substantially in Q3, with demand far exceeding production capacity. But other factors are driving Tesla’s momentum as well, including increasing EV market penetration and sales growth in China, margin expansion and higher production rates. Adding to the bullish case was the announcement that Q4 vehicle deliveries totaled 308,000, which crushed Wall Street’s estimates by 17%. Tesla’s Model 3 sedan and Model Y mid-size SUV remain the big business drivers today, and the company knocked it out of the park in Q4, with combined deliveries increasing a whopping 83% from a year ago (up 28% sequentially). For all of 2021, the company delivered over 936,000 vehicles, up 87% from a year ago, and analysts see a lot more where that came from as Tesla continues to boost capacity to meet demand—Wall Street sees earnings up another 46% in 2022, which will likely prove conservative.

“After a massive run-up from late 2019 through early 2021, TSLA caught a much-needed breather last year, correcting as much as 40% and coming out of the public’s eye for a while (a good thing). The stock tightened up considerably during the summer, finally breaking out in October and running up to around 1,200 by early November. There was another sharp pullback with growth stocks (29% deep!) the past two months, but TSLA seems to have bottomed and is working on a new base. After today’s pop, we’d advise entering on weakness.” With a recent trading range between 1,000 and 1,200, the stock may be at a good entry point here, but I’m going to leave it on hold for long-term investors. 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 while the stock has done nothing for us yet, Tom thinks it’s only a matter of time. In his update last week, he wrote, “The stock has done nothing since the spring, but it has been rallying along with the financial sector over the past couple of weeks. The ten-year rate has been moving higher in recent weeks. The pressures of inflation and a strong economy combined with the Fed tapering are likely to put upward pressure on rates in the months ahead. That missing piece of the puzzle should drive the stock to new highs and beyond.” BUY

Veeco Instruments (VECO), originally recommended by Carl Delfeld in Cabot Explorer, is an American high-quality provider of state-of-the-art semiconductor fabrication equipment whose stock is just a week off its recent high. In his update last week, Carl wrote, “VECO shares were up marginally this past week and are up about 20% over the past month. This is not an exciting story but has been a steady performer. Revenue growth for 2021 is expected to be up 30% and earnings are supposed to be even better. VECO represents a backdoor play on semiconductors. I recommend that you acquire shares if you have not already done so.” BUY

Verano Holdings (VRNOF), recommended by yours truly in Cabot Marijuana Investor, bottomed with the entire cannabis sector late last year, and is now showing increasing signs of accumulation. Verano has operations in 12 states, including 93 operational dispensaries. In late December, the company announced two small acquisitions in Connecticut, and just last week, it announced the hiring of a new CFO, Brett Summerer, who previously served as Vice President, Head of Supply Chain Finance and CFO of The Kraft Heinz Company’s U.S. Operations. If you’re underinvested in marijuana stocks, you could buy VRNOF here, or wait for a possible pullback to 11. BUY

Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier and featured here three weeks ago, is a well-known company whose stock is temporarily cheap. In his update last week, Tom wrote, “This company makes money every time its cards are swiped. And its cards comprise about a 50% share of all cards issued worldwide. It’s one of the best financial stocks to own. V has been hot stuff since hitting recent lows last month. The future is setting up very well for Visa. The global economy should bounce back next year. Travel will return. And that will be icing on the cake because U.S. business is already booming. It also helps that the financial sector is getting hot.” The stock is down today with the market, but volume is normal, so this could present an opportunity. BUY

WillScot Mobile (WSC), originally recommended by Mike Cintolo in Cabot Top Ten Trader, may have the least exciting story of any stock recommended here; the firm 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 Wednesday and is down in sympathy with the market since, and the drop below the 50-day moving average is reason enough to downgrade it to hold. HOLD

The next Cabot Stock of the Week issue will be published on January 18, 2022.