January 19, 2021

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

At the same time, it’s important (as ever) to monitor your individual stocks and prune any from your portfolio that no longer deserve to be there. In our portfolio, Berkeley Lights (BLI) is being pruned this week, for a small loss.

As for today’s recommendation, it’s a fast-growing consumer streaming service that came public in 2018 and has hit new highs recently—and you may be familiar with it.

Cabot Stock of the Week 331

Overall, the market remains very healthy. Yes, sentiment is a bit high, and yes, valuations are a bit high, but I learned long ago not to fight the trend. Thus, the portfolio remains heavily invested, and still very interested in owning leading growth stocks. And today’s recommendation is one of them—a consumer name that’s become quite popular in recent years (I became a user in recent months). The stock was originally recommended by Mike Cintolo in Cabot Top Ten Trader and here are Mike’s latest thoughts.

Spotify (SPOT)
On the growth side of the market, we’re always on the lookout for what we like to call emerging blue chips—decent-sized firms with a leading product in a big, growing market, with the potential to grow rapidly (and reliably for years). These situations usually go along with a stock that’s under accumulation and has growing sponsorship, though it’s not “over-owned” among the institutional crowd.

Spotify mostly fits that description. This Luxembourg-based company is the global leader in streaming music and, increasingly, podcasts. The idea here, though, is less about any one category (music, etc.) and much broader than that, with Spotify’s offerings being the voice in your ear many times each day, whether you’re making breakfast for the kids, jogging or working out or simply looking for something to listen to in the car.

Spotify is the leader in this “ear share” and is the odds-on favorite to continue to expand its share going forward. The firm has two main subscription packages now—premium ($10 per month or so, with unlimited access to music, podcasts, skipping, playlists and the like) and ad-supported (ads, obviously, with more limited selections and skips). And growth in both areas has been solid; at the end of September, the company had 144 million premium subscribers (up 27% from a year ago) and 185 million ad-supported users (up 31%).

This is a global operation as well, with about one-third of users in Europe, one-quarter from North America, 22% in Latin America and 19% from the rest of the world. It’s worth noting that the premium segment brings in the vast majority of revenue, though (a) both are growing nicely (currency-neutral Q3 revenue growth of 20% for premium and 15% for ad-supported), and (b) there should be a pickup in advertising after a brief pandemic-induced plunge in the middle of last year.

The newest part of the story involves podcasts, an industry that’s growing faster than music and where Spotify is investing heavily. The big splash came last summer when the firm inked Joe Rogan to a huge deal. Since then, it’s lined up podcasts for Michelle Obama, Kim Kardashian, Prince Harry and others, and even has some story-type podcasts lined up with Warner Brothers and DC Comics. Eventually, Spotify is thinking about have a podcast subscription service, too; in the meantime, 22% of users listen to podcasts, a figure that’s steadily rising.

The big bugaboo here, at least in terms of investor perception, is competition. Will Spotify be like Netflix, which thrived despite other streaming video offerings, or will the huge investments needed wipe out any profits for years to come? Indeed, Spotify’s bottom line has been consistently in the red (though to be fair, the firm is free cash flow positive), and last Friday the stock gapped down after news that Apple could step up the battle in the podcast wars.

Thus, the story isn’t without risk, but in our experience, the leader in a field usually stays the leader, and given the mass market and numerous ways the company can increase business (new users, new subscription products, a stickier user base given all the content), the odds favor Spotify remaining the winner over time. The next big update will be on February 3 when Q4 results are released.

And the stock, while choppy, tell us big investors agree. Shares busted loose from a huge post-IPO base last summer (after the Joe Rogan signing), then entered a four-month sideways consolidation through November. The breakout from there was powerful, though the stock has chopped around since then; it looked to be getting going two weeks ago, but sellers arrived as growth stocks and the market got a bit dicey late in the week. Near term, further wiggles are possible, but we think the stock offers a solid risk/reward entry point around here.

Current Recommendations

Overall, our holdings continue to perform very well—with many hitting new highs in recent days. But I do have one recommended sell, Berkeley Lights (BLI), which has weakened recently. Details below.

Changes
Berkeley Lights (BLI) to Sell
Columbia Sportswear (COLM) to Hold

Berkeley Lights (BLI), originally recommended by Tyler Laundon in Cabot Early Opportunities, sold off on its biggest volume in months last Wednesday, and has shown little strength since. Technically, there’s a chance the stock will build a base here at 80, but there’s also a chance this nascent downtrend (which has taken the stock below its 50-day moving average) will continue—and I don’t like that prospect. Plus, it’s important to cut losses short. Therefore, I’m going to sell now, take our small loss, and move on. SELL.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor, and featured here last week, broke out to a new high on Thursday and pushed even higher on Friday, so we’re off to a good start. In his update before the breakout, Tom wrote, “This operator of infrastructure assets is a tried and true hand in a subsector that is gaining increasing popularity. The stock performed on par with the market in 2020 with a 15.5% total return for the year. But next year there is a good chance it posts better relative performance. Earnings were resilient during the pandemic and should get a bounce as restrictions abate and transportation assets rebound. The partnership has also been using its considerable liquidity to purchase high-margin assets on the cheap as strapped governments sell to raise money. The combination should deliver a higher level of growth.” BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, continued to decline last week, but the volume of selling has been shrinking, and the stock has just touched its 200-day moving average, so it’s likely to stock will find support soon. In his update last week, Bruce wrote, “KO shares fell 5% in the past week on downgrades from JPMorgan, RBC, Guggenheim and Deutsche Bank. The downgrades followed two themes. First, the slower roll-out of Covid vaccines will delay Coca-Cola’s post-pandemic recovery. We see this as a timing issue and are not particularly concerned with the precise timing of the recovery. Second, Coca-Cola faces a tax claim for $3.3 billion by the IRS in a dispute over Coke’s cost allocations used to determine the company’s U.S. taxes during the 2007-2009 time period. This is not new news, and we’ve considered the maximum risk to be a $3.3 billion cash payment. Yet, analysts are focusing on a higher cost, as much as $9-$10 billion if taxes from 2010 to 2017 (until the tax code was changed) are disputed. We are not legal experts, but we believe the case will be resolved at a reasonable cost if not won outright. The cost allocation formula that Coca-Cola used was pre-approved by the IRS, and the IRS appears to be using Coke’s bottlers as a comparison despite the clearly different economic models, among our reasons. Regardless, the issue will be an overhang on the shares for months. The stock has about 28% upside to our 64 price target. While the valuation is not statistically cheap, at 23.7x estimated 2021 earnings of $2.11 and 21.5x estimated 2022 earnings of $2.33 (the two estimates ticked down by a cent 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, continues to trend higher. In his update last week, Bruce wrote, “Columbia’s shares rose about 9% this past week and have about 8% upside to our 100 price target. Valuation is 25.2x estimated 2021 earnings of $3.67, with the earnings estimate unchanged from last week. On 2022 estimated earnings of $4.64 (up one cent this past week), the valuation is a more reasonable 19.9x. For comparison, the company earned $4.83/share in 2019. With the shares trading just above 92 and approaching our 100 price target, we are now moving them to Hold.” I’ll do the same. HOLD.

CrowdStrike (CRWD), originally recommended in Cabot Growth Investor by Mike Cintolo, hit another record high last Tuesday and has pulled back normally since. In last week’s update, Mike wrote, “When we first took a stake in CRWD last month, we said that the company has all the makings of an emerging blue chip that will grow rapidly for years and (more important for us) become a “core” position in hundreds of funds. So far, that seems to be playing out, with the SolarWinds hack likely to accelerate demand. At an investor event this week, there was lots of technology-riddled chit-chat, but one financial note caught our eye—CrowdStrike’s CEO made it a point to say that as more of its clients add more modules, a lot of that falls right to the bottom line (i.e., huge margins on cross-sells), and they see a lot more of that happening in the future as the business has so much momentum. He also said flat out that the firm isn’t going to necessarily sell out for growth, saying that cash flow is also vital (music to big investors’ ears). As for the stock, it remains strong, though the latest push higher has come on tame volume; that’s not a red flag, but if you want in (whether a new position or to average up), we’d either start small or (preferably) wait for dips.” The current dip may find support at 200, and that would mark a decent entry point. BUY.

Elastic (ESTC), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here just two weeks ago, broke out to a record high last Friday and thus has already brought us a nice (paper) profit. Traders could easily take the profit and exit here. I’m going to downgrade it to hold and give the stock a chance to move higher in time. HOLD.

General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, has become a very interesting investment!

In last week’s update, Bruce wrote, “There was a lot of favorable news on GM recently. First, the company reported that its 4th quarter U.S. vehicle sales rose 4.8% from a year ago, one of the best results in the industry. GM is estimated to have gained about ½ point of market share in 2020. GM also regained the top spot over Ford in large pickup truck sales, an increasingly important category that comprises 17% of total vehicle sales, up from only 12.5% five years ago. Prices also rose considerably, ranging from +4% for light pickup trucks to +11% for large SUVs, helped by tight inventories. Price increases represent almost pure profit for carmakers. Also, GM said that it is working with “all the best startups” on next-generation electric vehicle battery technology and planning to boost production of its Ultium battery system. The company is pressing hard to become a major battery supplier, perhaps pushing Tesla into a weaker market position. GM spoke at the annual (virtual) Consumer Electronics Show, announcing its launch of Brightdrop, a new electric delivery truck and related services business. Its first product is the EP1, an electric-powered pallet. The EV600 van will be ready for delivery by year-end to its first customer, FedEx. This segment offers considerable promise for new growth for GM. GM shares surged 18% since last week and now are approaching our recently-raised 49 price target. Valuation is at 7.4x estimated 2022 earnings of 6.46. This estimate slipped fractionally, as the rising Covid case-count may slow demand and a shortage of computer chips are slowing production. Our 49 price target can be thought of as assuming a 7x multiple of $7.00 in earnings. GM may have more innovative firepower and earnings potential than we previously appreciated.”

Following that, Mike Cintolo on Friday told his Cabot Top Ten Trader readers, “GM likely isn’t going to run away on the upside, but it’s clearly changed character in recent months, and the recent bounce off the 50-day line (to multi-year highs) came on massive volume. We think dips of a couple of points would be buyable if you don’t own any, with a stop near 44.”

And then this morning the stock gapped up to new highs on the news that Microsoft would make a major investment in the firm’s Cruise self-driving vehicle unit. Thus, the stock is now strong, but well above Bruce’s target. Profits certainly could be taken here—but I’m going to wait for Bruce’s next update. 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 it 50-day moving average higher. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, hit new highs on three days last week and is currently on a tiny pullback. In his update last week, Bruce wrote, “TAP shares have about 13% upside to our 59 price target. Estimates continued to tick up in the past week. TAP shares trade at 12.3x estimated 2021 earnings of $4.22. 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 8.6 current year estimates, among the lowest valuations in the consumer staples group and well below other brewing companies.” BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has advanced in each of the past six weeks—yet doesn’t seem particularly overbought. In last week’s update, Tom wrote, “There isn’t a lot to say here. I slobber all over this stock every week. This combination regulated and alternative energy utility delivers both growth and stability. Alternative energy keeps getting cheaper and more in demand. It’s a winning combination. The stock has blown away the performance of the overall market and should continue to do so. By the way, it just made a new all-time high.” HOLD.

Nuance Communications (NUAN), originally recommended by Tyler Laundon in Cabot Early Opportunities, hit more new highs last week and has pulled back minimally since. Long-term prospects for this voice-recognition giant are terrific, but buyers should wait for lower-risk entry points. HOLD.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a new high last week and now has pulled back to support. In his update last week, Mike wrote, “PINS has bounced off its 50-day line, which it tagged right at year-end, and actually kissed new high ground yesterday, though it has been pretty sloppy the past couple of days. Odds are against an up-and-away move from here (though in this jubilant environment, anything is possible), but the bounce is another piece of evidence that there are big investors looking to build positions, especially on dips toward support. Fundamentally, nothing has changed, so we’re sticking with our Buy rating, but as with most stocks, ups and downs of a few points are to be expected.” BUY.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor and now recommended by Tom Hutchinson in Cabot Dividend Investor, hit another new high today. In his update last week, Tom wrote, “It’s all about 5G. The chip maker stock had a great year. The position has returned 90% since being added to the portfolio in late 2019. But I don’t think the 5G story has really taken hold yet. QCOM is up for more individual reasons like the favorable court ruling and better than expected earnings. But the full throated market embrace of the 5G situation got delayed during the pandemic. QCOM is still reasonably valued and should get a boost from here as earnings continue to rise and the post-pandemic investor embraces 5G.” HOLD.

SABESP (SBS), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, saw some big buying after bottoming at 7.6 a week ago, so I think the worst has passed for this stock. In his update last week, Carl wrote, “SABESP is a conservative water play with plenty of room to grow in its monopoly territory of Sao Paulo with 18 million not yet connected to its services. In addition, the company is expanding to other regions in Brazil, and even into neighboring countries. It is trading at about 12 times projected earnings, quite a bit off its 52-week high. SBS is an excellent water play in a country with a stock market in a strong uptrend.” BUY.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, hit new highs on three days last week and remains very close to the latest, signaling that selling pressure is minimal. In his update last week, Carl wrote, “Shares continued their upward surge in 2021, moving from 199 to 227 as the company announced it is acquiring an Indonesian bank. In December, it was granted a license to operate a full-service digital bank by the Monetary Authority of Singapore. This is a big deal, but I would again recommend that investors take some profits here. Expect this story will likely continue into 2021 since 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.” HOLD.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, did not hit a new high last week, and that’s fine with me; in my book, this leading over-achiever of 2020 is due for a long rest. Traders could cash in some partial profits here, but long-term investors can hold. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, hit record highs on three days last week and has now pulled back moderately. The sector is still very strong, as the Democrats running Washington for the next four years are expected to be very supportive of the industry. HOLD.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, hit new record highs last week and has pulled back moderately since. In last week’s update Mike wrote, “After five weeks of ups and downs (including a knock on the head last Friday after a huge block sale of 38 million shares by Softbank), UBER rallied nicely earlier this week, bolstered by news that it (along with peer Lyft) has talked with Uncle Sam about helping with the vaccine rollout in a couple of different ways (rides to/from vaccine sites, etc.). Beyond the news, though, the recent, controlled rest likely represented big investors accumulating larger positions, and now the next upleg has begun. If all goes well (and the odds favor it will), both the firm’s Rides segment (as the virus fades into memory later this year) and Delivery business (as third-party delivery of groceries, take-out and even prescriptions become mainstream) should surge in the quarters to come.” BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, gapped down back on December 14 when a test flight was aborted, but gapped up last Thursday (exactly a month later) when the company released a statement that explained that the problem was one of communications with sensors and that the safe glide back to the runway, with all pilots healthy, was a perfect demonstration of the care the company is taking to make the business safe. Thus the stock is roughly unchanged from a month ago. And the future is bright. HOLD.

The next Cabot Stock of the Week issue will be published on January 25, 2021.

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