January 18, 2022

With the market down big today, it’s possible that the growth stock correction has done enough damage—but until we see real strength, it’s better to adjust to the trend—and that means going with a value stock today—an old technology name that you’ll recognize. As for our current holdings, there is only one change, a downgrade of one stock, Broadcom (AVGO), to hold.

New Recommendation

With growth stocks still under pressure and more conservative stocks holding up better, it makes sense this week to lean toward a lower-risk dividend-payer with minimal downside risk. The portfolio is already doing well with Cisco, and this week’s recommendation is similar, in that it’s a tech stock that was hot more than two decades ago and is now cheap. The stock was originally recommended by Carl Delfeld in Cabot Explorer, which has free rein to invest wherever Carl finds opportunities, and here are Carl’s latest thoughts.

Oracle (ORCL)

Oracle is the world’s largest database management company, with more than 430,000 customers in an incredible 170 plus countries. For close to half a century, the company has offered its software and more recently, cloud-engineered systems.

Most investors still view Oracle primarily as a software company but increasingly, the company wants to be seen primarily as a cloud company, so sales and earnings should expand. Oracle can build on its already sterling reputation and extensive client base to expand into the highly sought-after cloud business.

In addition, Oracle has the world’s first and only autonomous database. It has the industry’s broadest and deepest suite of cloud applications. More than 18,000 patents worldwide protect Oracle’s business model and profit margins. Most important, Oracle is now using all this to actively take on the “big three” in cloud services. These big three are Amazon Web Services, Microsoft Azure and Google Cloud Platform. Google now claims 6% of the cloud market, up 1 percentage point from a year earlier, though still far behind Amazon’s 41% share and Microsoft’s 20%.

These mega players currently dominate the U.S. public cloud market. This market is growing so fast because instead of corporations running up bills building and maintaining their own data centers and servers, they can purchase what they need from cloud players – and then scale up or down as they wish.

Many major companies have moved some computing to cloud services and this trend is picking up speed. Oracle has reinvented itself for this new trend, offering a cloud-only version of its core database software business while offering both speed and security.

Oracle has been helping hundreds of thousands of corporate customers by moving some of them to the cloud. In addition, like the big three, Oracle has been on the prowl for new companies, spending more than $80 billion on 150 acquisitions. This is still doable since it still has an ample cash position in cash to make it more attractive to customers. Microsoft has also taken stakes in several startups as part of deals that entail them using its cloud.

Oracle last year tried to buy a major stake in TikTok as part of a deal to have the China-owned social media app use its cloud service. Oracle also announced in late 2021 its biggest deal ever, the $28.3 billion acquisition of the medical-records company Cerner Corporation. This partnership will address a major challenge in healthcare, that of datasets that can’t communicate with one another.

In the U.S., medical records and information are hosted on a range of platforms, which can make it difficult for one provider to collaborate with others, or for patients to get easy access to their data.

Some of this cash has also been used to buy back its own shares, reducing its share count by 40%. Oracle stock offers us growth at a very reasonable price. The stock is selling at only about 20 times earnings with big profit margins, a high return of equity, $39 billion in cash, and I like the fact that 42% of stock is held by insiders.

Oracle certainly has a global perspective. It recently announced that it will look to double its clients in Latin America, and it plans to train 40,000 young workers in the region. Oracle is the world’s largest database management and an emerging cloud company. It offers us growth at a very reasonable price.

Current Recommendations and Changes

Current Recommendations

Value stocks remain strong (particularly energy and financials), while growth stocks remain weak, so in general, you should lean away from growth with new investments. In our portfolio, we sold two growth stocks last week and there are a couple more that are at risk, but there’s also the chance that today’s heavy selling is the last down leg of a normal correction—and that today marks a great buying opportunity! Yes, I’m always optimistic! Details below.

Changes Since Last Week’s Update
Broadcom (AVGO) to HOLD

Arista Networks (ANET), previously recommended by Mike Cintolo in Cabot Growth Investor is our biggest loss, so a definite candidate for sale. On the other hand, Mike says that it’s held up very well considering the damage inflicted on other growth stocks, and that it might be a great buy here. In his update last week, he wrote, “While most of the growth stocks that had extended runs have come unglued, networking-related names really just got going in the Q4 timeframe as indications of accelerating demand reached Wall Street. So, it makes some sense that ANET, while taking on water during the worst of the selling, is still holding up pretty well, currently right on its 50-day line, which is heroic in this environment. (Other plays like Ciena (CIEN) and Juniper (JNPR) are also acting well.) Fundamentally, one analyst said this week that it’s “all systems go” for networking with cloud, enterprise and 5G-related spending all likely to pick up this year. For Arista, hyper-scale spending should be the main driver—data-center CapEx was up 22% last year even with supply issues, that growth rate should accelerate this year and Arista has exposure to rising spending at Facebook, Amazon, Google and Apple. Back to the stock, we’re not just holding and hoping, and if ANET and other networking stocks crack during another market leg lower, we’ll go to Hold or possibly cut bait. But right here, it certainly appears that big investors are hesitant to dump shares, with the stock “only” 10% off its high and still near where it gapped up in November. Hold on if you own some, and if you already have plenty of cash, we’re OK nibbling on some shares here.” I’ll keep it on buy, for aggressive growth investors. 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, “Bristol provided an encouraging update at JPMorgan’s Annual Healthcare Conference on January 10. Most tangibly, the company announced that it will repurchase $5 billion of its shares in the first quarter – a solid idea in our view given the highly discounted share price.

The company guided for full-year sales of about $47 billion. This was in line with fractionally lower than consensus estimates, but nevertheless was encouraging because they did not cut the estimate in the face of revenue losses due to patent expirations on treatments like Revlimid. Bristol guided for full-year earnings per share of $7.65 – $7.95 ($7.80 at mid-point), representing growth of about 4% compared to 2021 estimated earnings. Analysts slightly raised their consensus estimate for 2022 to $7.89, on the assumption that Bristol is under-promising. Similar to the revenue guidance, the company’s confidence in its 2022 earnings outlook, because it didn’t lower its 2022 guide, is encouraging.

Essentially, the company is saying that it has confidence that it can navigate the year’s patent expirations pressures. If this confidence is backed up with actual results during the year, it would clearly be supportive for the shares and provide at least some confidence that Bristol can reasonably navigate future patent losses. It also would buy the company more time to develop its internal pipeline and find worthwhile acquisition targets.

The company reiterated its long-term financial targets through 2025, including maintaining low-mid-40% operating margins. Bristol provided its target (not technically “guidance”) for $45 billion – $50 billion in cumulative free cash flow from 2022 to 2024, extending its same target for the 2021-2023 time period, and that it would use this financial firepower to make small and mid-sized bolt-on acquisitions (rather than a major transformative/risky acquisition), continue to cut its debt and return cash to shareholders.

BMY shares are approaching their mid-2021 high and have about 19% upside to our 78 price target. Valuation remains low at 8.3x estimated 2022 earnings, compared to 11x or better for its major peer companies. The stock’s 7.7x 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, had a great run from mid-October through the end of December, but now it’s giving some back, which is normal. In his update last week, Tom wrote, “Ouch. This legendary technology player had been hot since the beginning of October but has really cooled off over the last week. After moving about 40% higher in three months, AVGO has fallen more than 8% in the past week. Technology stocks have been pressured as investors fear rising interest rates will pressure margins. Plus, there is concern about the enduring chip shortage and AVGO was probably due for a consolidation anyway. The company has been masterful in managing the chip shortage so far. And the longer-term story is still very strong. But we will reduce it to a Hold until it breaks the recent downtrend.” I’ll move to Hold with Tom. 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 made another new high last week, but just barely. It has since pulled back just a little. It is hanging strong in an environment that has been tough for defensive dividend payers, so that’s good. 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. (Note: 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, hit a new high three weeks ago and is on a normal shallow correction. 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 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, is up today, as energy stocks remain strong. In his update last week, Mike, wrote, “We remain very bullish on energy stocks, which have gotten off to a great start in 2022 as our thesis continues to play out: Investor perception is changing for the better as most leading names (including Devon) will be paying out big dividends, buying back stock and further reducing debt even if oil and natural gas slip 20% or so from here. We’ve written a lot about that (cash flow remaining solid even in less fruitful times), but given that oil prices have already bounced back above $80 despite virus worries and Fed hawkishness (natural gas has also popped with the cold weather), along some bullish forecasts from sharp industry players (Pioneer Natural Resources has liquidated its remaining oil hedges for 20220), we may have to start discussing what happens if energy prices remain elevated—at $80 oil and $4 natural gas, Devon’s free cash flow would likely be around $7.50 per share in 2022 (!), a bunch of which would surely be returned to shareholders in dividends or buybacks, with the rest kept to retire future debt or fund small, accretive acquisitions. That is probably one reason the stock has been acting great, with DVN lifting to new highs above 44 late last month and rallying all the way above 50 this week. Short term, we do think the risk of a pullback for whatever reason (oil price dip, market rotation) is growing, but we also think the sector strength bodes well when looking at the weeks and months to come. We could average up in the stock if an orderly retreat comes soon, or we could even add a second energy name to complement DVN. Right here, though, we’re standing pat—if you own some, hold on, and if not, we’re OK starting a position here or preferably on weakness.” BUY

Marvell Technology (MRVL), originally recommended by Carl Delfeld in Cabot Explorer, last hit a high in early December, and it’s been base-building since then, holding up impressively above the gap created after the great third quarter earnings report. In his update last week, Carl wrote, “MRVL shares were up 84% in 2021 but flat so far in 2022. Marvell may be the #1 semiconductor pick for 2022, with seven out of the top 10 automotive original equipment manufacturers (OEMs) purchasing Marvell chips. This is a growth stock that is demonstrating relative strength and holding firm in a tough market.” Additionally, Mike Cintolo recommended the stock in Cabot Top Ten Trader on December 6 and has a suggested stop (for traders who have a loss) near 76.5. HOLD

MP Materials Corp (MP), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here last week, is the strongest stock in the portfolio today. As explained last week, the stock is a high risk, because it’s a small company and the rare earths industry is subject to all kinds of outside factors, but potential for gain is high too. BUY

Sensata Technologies (ST), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, came very close to hitting another new high last week, but the long-term chart shows the stock still knocking on resistance at 65 that has constrained the stock since last March—and that means that once the stock breaks through, it could really move. 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. Sensata has an arguably under-leveraged balance sheet and generates healthy free cash flow. The relatively new CEO will likely continue to expand the company’s growth potential through acquisitions. Electric vehicles are an opportunity as they expand Sensata’s reachable market. ST shares remain just below their 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 18% upside to our 75 price target. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to hold up in the range between 1000 and 1200, which is impressive in this market environment. Fourth quarter results will be reported on January 26 after the market close. Also, while I’ve explained my reasons for holding TSLA long-term, the better short-term opportunity is in Ford (F), which just earned a spot in Cabot Top Ten Trader. 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 technically hit a new high last Thursday, the reality is that it hasn’t really broken out above the level that’s constrained it since last May—which means that when it does, it’s likely to have a good run. In his update last week, Tom wrote, “USB appears headed right back to the high. The stock has done nothing since the spring, but it has been rallying along with the financial sector over the past couple of weeks. USB has had a nice 10% move higher in the past few weeks along with the 10-year rate. 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. The bank will earn higher net interest spreads with a steepening yield curve. 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 Early Opportunities, is the rare technology growth stock that’s hitting new highs! In his update last week, Carl wrote, “VECO shares jumped from 29 to 32 this past week and were up 4.2% yesterday. This is not an exciting story but rather a steady performer. Revenue growth for 2021 is expected to be up 30%, and earnings growth is supposed to be even better. Veeco 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, even though the sector as a whole is showing no real strength yet. There’s no rush, but 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, is a well-known company whose stock is temporarily cheap. In his update last week, Tom wrote, “This transaction behemoth had been red hot, but it sold off last week. A Japanese investment firm downgraded the rating. The rationale was that so many customers converted from using cash to a card during the pandemic that the analyst felt it would cannibalize future growth. That’s nonsense. More cards are now being used. Plus, the international recovery and renewed travel will give the company a big boost in the new year. The stock is already recovering.” BUY

WillScot Mobile (WSC), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a new high just two weeks ago, but the correction since then has taken the stock close to Mike’s stop (he suggests 37, which is just below the support level of early December). We’ll hold for now but will sell if the stop is tripped. HOLD

The next Cabot Stock of the Week issue will be published on January 24, 2022.