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, there are no stocks that fall into that category this week.
But the market is pricey. Stocks are extended. So today’s recommendation is a low-risk dividend-payer with solid growth prospects as the world transitions to a world of clean energy.
Cabot Stock of the Week 332
Overall, the market remains very healthy—though frothy. I’m happy to be in sync with the trend, which is why the portfolio remains heavily invested. But I also value the stability of lower-risk stocks that are likely to resist the strong gravitational pull that will take over when the market finally rolls over. Thus, this week I’m swinging back to the conservative side with a solid low-risk dividend-payer that has modest upside potential. The stock was originally recommended by Tom Hutchinson in Cabot Dividend Investor and here are Tom’s latest thoughts.
Xcel Energy (XEL)
Utility stocks fill a great niche in any investment portfolio, especially when stock prices get a little frothy. The sector is the most defensive in the market as earnings are virtually immune to economic cycles. Stocks also pay high dividends and typically hold up very well in down markets.
Xcel Energy provides all those advantages plus exposure to the fast-growing and highly sought after alternative energy market.
Xcel is a regulated electric and natural gas utility serving 3.7 million electric customers and 2.1 million natural gas customers in eight states, primarily in the northern and southwestern U.S. It is also one of the largest renewable energy providers in the U.S. with 28% of electricity sales generated from alternative energy sources in 2019. Alternative energy is what separates XEL from the utility pack and makes it a much better investment. It enables investors to play defense and offense at the same time. You get low volatility with defensive and reliable earnings plus exposure to one of the most exciting and fast growing areas of the market.
Results support that bold statement. XEL has not only consistently blown away the returns of the utility sector, but it has also beaten the return of the S&P 500 over the past three- and ten-year periods. Investors have gotten returns that have bested the overall market with far less volatility. The stock sports a beta of just 0.23, meaning it is less than one quarter as volatile as the overall market.
How do they do it? Earnings have been remarkably consistent. The company has a goal of growing earnings 5% to7% per year. From 2005 through 2019 earnings grew at a compound annual rate of 6.1%. While that might not sound exciting, it was good enough to deliver average annual total stock returns of better that 14% over the last ten years. The utility has been heavily investing in clean energy, primarily wind and solar power and Xcel now generates about a third of the electricity it delivers from these clean sources. The company has an ambitious goal of reducing carbon emissions 80% by 2030, from 2005 levels, and being 100% carbon free by 2050. It’s on track as carbon emissions are already down 44% from 2005 levels, as of the end of 2019.
Xcel is also investing in hydrogen energy powered by nuclear to replace natural gas power generation in the future. The company seeks to be a national leader in providing electric vehicle charging stations for homes, fleets, and public charging as well. It’s a heavy investment in clean energy. The company plans to spend an additional $25 billion through 2025. But wind and solar get cheaper and cheaper to produce and the investment pays for itself through cost savings. In fact, overall costs have been held flat over the last five years, and customer rates have remained steady. Regulators like that. The bounty from these new and profitable power sources is being reinvested in more clean power capacity and transitioning Xcel into a utility of the future. It’s a cutting edge energy company of the future disguised as a stodgy utility.
Investors get it. And there’s no reason to believe the future won’t be at least as good as the past for the stock. The new administration is expected to go big in the direction of alternative energy with its legislation. That should culminate in tax breaks, subsidies and other goodies. But probably the biggest advantage will be a greater investor focus on alternative energy.
The dividend yield is a modest 2.7% but management is targeting 5% to 7% annual growth going forward. And the stock is cheap right now, as investors have focused on post-pandemic stocks since November, and focus has been drawn away from XEL. It has recently experienced a rare dip. That makes the stock cheap in an expensive market ahead of what promises to be a dazzlingly bright future.
|Revenue and Earnings
|Forward P/E: 22
|Qtrly Rev Growth
|Qtrly EPS Growth
|Current P/E: 23
|Profit Margin (latest qtr) 18.9%
|Debt Ratio: 131%
|One quarter ago
|Two quarters ago
|Dividend Yield: 2.66%
|Three quarters ago
|Price on 1/25/21
|Berkeley Lights (BLI)
|Brookfield Infrastructure Partners (BIP)
|Columbia Sportswear (COLM)
|General Motors (GM)
|Huazhu Group Limited (HTHT)
|Molson Coors Brewing Co (TAP)
|NextEra Energy (NEE)
|Nuance Communications (NUAN)
|Sea Ltd (SE)
|Virgin Galactic (SPCE)
|Xcel Energy (XEL)
Overall, our holdings continue to perform very well—with many on normal pullbacks after hitting new highs. The addition of XEL means our portfolio is once again full, with 20 stocks, and since there are no obvious bad apples in the bunch today, we’ll stay fully invested. Details below.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor, and featured here two weeks ago, hit a record high last Monday and has pulled back normally since. In his update last week, Tom wrote, “There’s a good reason this infrastructure partnership stock just made a new all-time high. It is a reliable and defensive dividend payer in a subsector that is becoming increasingly popular as the new administration embraces more spending. As well, BIP should be a boost in growth this year as its transportation assets recover and new acquisitions boost the bottom line.” BUY.
Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, looks to be building a bottom here, right on top of its 200-day moving average—so technically it’s attractive. Fundamentally, here’s what Bruce wrote in last week’s update: “We understand the issues (post-Covid recovery is delayed, tax matter may require a sizeable fine, more cyclical stocks are in vogue) and remain confident in Coke’s future. The tax issue, discussed in last week’s CUSA, will likely be an overhang on the stock for several months, however. The stock has about 32% upside to our 64 price target. While the valuation is not statistically cheap, at 23.0x estimated 2021 earnings of $2.10 and 21.1x estimated 2022 earnings of $2.29 (the two estimates ticked down in the past week), the shares are undervalued while also offering an attractive 3.4% dividend yield.” BUY.
Columbia Sportswear (COLM) originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, has pulled back normally over the past two weeks but remains in an uptrend. In his update last week, Bruce wrote, “Columbia’s shares have about 9% upside to our 100 price target. Valuation is 25.1x estimated 2021 earnings of $3.67 (estimate unchanged from last week). On 2022 estimated earnings of $4.64 (unchanged), the valuation is a more reasonable 19.8x. For comparison, the company earned $4.83/share in 2019. We recently moved the shares to a Hold as they are approaching our 100 price target.” HOLD.
CrowdStrike (CRWD), originally recommended in Cabot Growth Investor by Mike Cintolo, has pulled back normally over the past two weeks but remains well above its 50-day moving average. In last week’s update, Mike wrote, “CRWD has been choppy in the past few weeks (225 to 195 to 240 to 220, round numbers), but it looks fine to us—in fact, a bit more seasoning and we’ll probably move to fill out our position. One item that stood out to us in the firm’s latest investor presentation was its view that, compared to how much firms are spending on cloud software solutions, cloud security spending is very low (just 1% or so of the total). CrowdStrike thinks that figure could jump five- to 10-fold in the years ahead as firms catch up! Whatever the exact numbers turn out to be, it’s clear this is going to be a hot growth area for a while, and we think this company’s Falcon platform will be the go-to offering for medium- to large-sized companies.” BUY.
Elastic (ESTC), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a record high last Wednesday and has pulled back slightly since (on light volume), so odds are good that we’ll see higher highs in the months ahead. HOLD.
General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, hit record highs last Tuesday, Wednesday and Thursday after the company reported that Microsoft was making a major investment in Cruise, the self-driving vehicle business that is majority-owned by GM. In the process, the stock climbed well above Bruce’s (recently-raised) target price of 49. Selling would have been simple, but with the equation changed because of the new information, I waited for Bruce’s input, and he provided this thorough one to his readers last week:
“As value investors in a remarkably robust (exuberant) stock market, full valuation impels us to want to sell a stock. Such is the case with General Motors. On most conventional metrics, the stock is fairly priced. Through the courtesy of several friends, we’ve seen some of the math that Wall Street analysts use to justify prices well over 100/share and find them laughable, at best. As GM shares burst again through our price target, we were on the razor’s edge of selling.
“However, we are also seeing GM undergo a major change – perhaps one of the most impressive turnarounds in American corporate history. Their conventional gas-powered vehicle operations are on an altogether different level than the GM of a decade ago. One needs to look no further than their greatly reduced breakeven volumes, helped no doubt by decisions to exit problem-markets like Europe and Russia, and the step-up in the quality and appeal of GM’s vehicle roster. In an economy juiced by generous government stimulus, low interest rates and tight supplies, we see this business becoming even more profitable.
“GM also has laid the groundwork for the future of the transportation industry. While early and murky, we see GM and Tesla creating a form of duopoly in North American electric vehicles. Yes, there are competitors, but we don’t see them as threats that would derail that duopoly, particularly as GM and Tesla extend their leads. FedEx’s deal with GM under the BrightDrop agreement illustrates this momentum.
“Another source of potential value for GM (and likely Tesla and perhaps Apple) is the streaming data services that customers might pay for on a monthly basis. Who would have thought, 30 years ago, that we would happily give up free radio and television to pay $150/month for streaming music/videos/ESPN/Disney/Netflix? Similarly, we happily pay $600 for a new phone every few years and $150/month for service to that phone. While it may seem like a stretch today, precedent says we will happily pay $150/month for some kind of service to our cars. As a value investor, I recognize the much-higher multiple that should be ascribed to those recurring and low-capital-intensity profits.
“So, we are raising our price target on GM to 62 yet are keeping the shares on a short leash. We ‘reserve the right to change our mind at any time’ and will thus move GM shares to a Sell even if they don’t reach 62.” 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 its 50-day moving average higher. HOLD.
Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, has pulled back normally since hitting a record high six trading days ago. In his update last week, Bruce wrote, “TAP shares trade at 12.4x estimated 2021 earnings of $4.23. 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 8.8 current year estimates, among the lowest valuations in the consumer staples group and well below other brewing companies. For investors looking for a stable company trading at a low valuation, TAP shares continue to have contrarian appeal. Patience is the key with Molson Coors. We think the value is solid although it might take a year or two to be fully recognized by the market.” BUY.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has been very strong since the start of 2021 (after treading water for three months) and hit another new high today! In last week’s update, Tom wrote, “Through most of the market recovery, pandemic beneficiary stocks were hot. Then, post-pandemic or “full-recovery” stocks got hot. In a few months something else will be hot. But none of those shifting fads seem to matter to this combination regulated and alternative energy utility. Rock solid income combined with the growth and excitement of alternative energy is always a winner with investors. And NEE is the poster child.” HOLD.
Nuance Communications (NUAN), originally recommended by Tyler Laundon in Cabot Early Opportunities, hit another new high last Wednesday 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, last hit a new high two weeks ago, but to my eye the stock has been slowing down since early December. Still, the chart is positive and Mike is bullish. Last week he wrote, “PINS did bounce off its 50-day line a couple of weeks ago, but that bounce didn’t go very far (or show much volume) before sellers showed up again. A drop back into the mid 60s (under the 50-day and back to its recent low) would probably have us going to Hold. Big picture though, we see no problem here: After the stock’s massive run in the fall, some digestion was necessary, and given the major breakout came in September, we still view the stock as early stage. We’ll stay on Buy, but we’d like to see some ‘real’ buying show up soon.” 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 last Wednesday and has pulled back normally since. In his update last week, Tom wrote, “How does another new all-time high sound to you? The stock continues to move higher even after returning 100% since being added to the portfolio a little over a year ago. But I don’t think the party is over. Qualcomm is a primary beneficiary of the 5G rollout as it currently has the only 5G smartphone chip and other important supporting technologies. It’s going to ring that register big time as the royalties flood in over the next year plus. It’s also likely that 5G becomes a market driver in 2021 as the pandemic finally fades.” HOLD.
SABESP (SBS), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, proved me wrong last week by breaking down through its recent low (at 7.6) and falling to its low of early October (7.3). But selling volume was big on the “bottom” day (last Friday) so I remain optimistic that the bottom has been established. Plus, Carl remains bullish. In his update last week, he wrote, “Overall this stock has been a bit disappointing. SABESP is a conservative water play with plenty of room to grow in its monopoly territory of Sao Paulo with 18 million people not yet connected to its services. In addition, the company is expanding to other regions in Brazil, and even in neighboring countries. It is trading at just 8 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. We will give it a bit more time in hopes that it will gain some traction.” BUY.
Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, continues to hit new highs! In his update last week, Carl wrote, “Shares were up from 214 to 233 as the company announced it is acquiring an Indonesian bank and recently won a bid for a digital banking license in Singapore. 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. Sea’s strategy so far is relying on its gaming group Garena to generate sufficient cash to fund surging growth in its e-commerce and digital financial services segment. Unprofitable thus far, the company’s e-commerce segment will likely see significant growth as it consolidates its dominant position in Southeast Asia and leverages this to expand to growth markets such as India and Latin America. Another growth driver with huge potential is SeaMoney, a digital payments platform that ties together its gaming and commerce segments.” HOLD.
Spotify (SPOT), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week as the stock had dipped toward it 50-day moving average, has bounced a bit and can still be bought here. If Netflix is the king of video streaming (though obviously there’s competition), Spotify is the king of audio streaming. BUY.
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit another new high today—but as much as I enthuse about the company’s products and its revolutionizing of the automotive industry, I can’t endorse buying the stock at this nosebleed level. 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, has pulled back moderately since hitting a record high two weeks ago (like much of the red-hot sector) and remains in a healthy, if extended, pattern. HOLD.
Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, fell through its 50-day moving average as it sold off this morning, but buyers appeared as the day wore on and brought the stock back up above the trendline. So, it’s volatile—but still okay. In last week’s update Mike wrote, “UBER looks fine overall, but it’s acting a bit funky of late—it had a big-volume selloff a couple of weeks ago (Softbank unloaded a bunch of shares), and it immediately gave up most of its recent breakout. None of that is a major red flag, and we’re holding on to our shares, but we do have our eyes peeled to see if the stock can find some support in the near-term. Still, as with many names, we’re not overthinking it—the trend here for the stock and business remains up, so we’re staying on Buy.” Also, Mike’s other advisory, Cabot Top Ten Trader (which bought around 35) has a stop at 46.5. BUY.
Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, surged higher this morning (as did many stocks with heavy short interest) and is now within spitting distance of its all-time high of a year ago. In last week’s update, Carl wrote, “SPCE shares leapt from 27 to 32 this week as Ark Invest announced it was launching a space ETF. This was welcome news as investors await Virgin Galactic going operational sometime in the first half of 2021. The company plans to build entire fleets of spaceplanes and to fly them out of multiple spaceports around the world with the goal of bringing in annual revenue of $1 billion. Given all the uncertainty regarding the timing of tests and then the launch of the spaceplanes, I recently moved this stock to a hold.” HOLD.
The next Cabot Stock of the Week issue will be published on February 1, 2021.
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