As we enter the brand-new year, we have a renewed buy signal from our intermediate-term timing indicator, and the best stocks are hitting new highs—including a lot in our portfolio. But one of ours is a true laggard, and will be sold today.
As for the new addition, it’s a hot growth stock favored by Mike Cintolo, which is seeing great growth in the exciting area of networking at the edge of the cloud.
As we start a brand-new year, the major indexes remain near record highs—nothing new there. But the good news today is that the broad market, which had been lagging, began showing renewed strength last week, and it’s been strong enough to turn our intermediate-term timing indicator positive again. So we can push harder on the accelerator again, and that’s what we’re doing with today’s recommendation, a company in the rapidly evolving field of networking technology. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor and here are Mike’s latest thoughts.
Arista Networks (ANET)
For aggressive investors, the technology industry has long offered the most exciting opportunities for rapid growth, as the world’s appetite for data transfer, storage and analysis continues to grow. Recent years have seen the cloud take center stage and Arista is a play on that, as its equipment works at the edge of the cloud. Arista has always been a leader in this space, with multilayer network switches and software-driven networking solutions for cloud data centers and other (usually big) computing environments. In the third quarter, Arista reported eye-opening sales growth and deft supply-chain management along with an impressive stock buyback program. The company reported estimate-beating revenue of $749 million, up 24% from the prior year and up 6% sequentially, with per-share earnings of $2.96 beating the consensus by 23 cents. Despite facing “acute” supply chain challenges in Q3, Arista’s gross profit margin was a solid 65%, within the firm’s long-term estimated range thanks to healthy higher-margin software and services sales. Arista’s efforts in expanding its reach beyond large cloud data centers are bearing fruit, as its campus (smaller enterprise) business is expected to double to $200 million in 2021 and double again next year. Management expressed confidence in the outlook by increasing its share repurchase program by $1 billion (worth 2.5% of the current market cap), as well as announcing a four-for-one stock split. More important, Arista thinks the best is yet to come. Management sees 2022’s sales growth accelerating to 30% (up from 25%-ish this year), well above analysts’ expectations, and revenue expanding at a 15% compound annual rate in the next five years (reaching annual revenue of $5 billion by 2025) based on exploding demand from cloud computing customers.
The earnings report in early November sparked a big gap up, and the stock consolidated that gain into December. In the growth stock selloff, it fell less than 12%, while holding the top of its huge earnings gap, which was an impressive display of strength for an aggressive stock. And since then we’ve seen a great advance to new highs, basically ignoring the mid-month selling and spiking higher as the indexes have shaped up. Obviously, nobody can rule out another dip if the market runs into a wall, but if this rally gains steam, it’s possible ANET’s uptrend (which didn’t really begin until the earnings gap in November) could accelerate. Combined with a rapid, reliable growth story as the cloud titans ramp spending, the stock certainly looks like a winner.
|ANET||Revenue and Earnings|
|Forward P/E: 37.5||Qtrly Rev||Qtrly Rev Growth||Qtrly EPS||Qtrly EPS Growth|
|Current P/E: 53.1||($mil)||(vs yr-ago-qtr)||($)||(vs yr-ago-qtr)|
|Profit Margin (latest qtr) 28.3%||Latest quarter||749||24%||0.74||21%|
|Debt Ratio: NA%||One quarter ago||707||31%||0.68||28%|
|Dividend: NA||Two quarters ago||667||28%||0.63||24%|
|Dividend Yield: NA||Three quarters ago||648||17%||0.61||9%|
Current Recommendations and Changes
|Stock||Date Bought||Price Bought||Yield||Price on 1/3/22||Profit||Rating|
|Arista Networks (ANET)||New||—||0.0%||142||—||Buy|
|Bristol Myers Squibb (BMY)||11/2/21||59||3.2%||62||5%||Buy|
|Brookfield Infrastructure Partners (BIP)||1/12/21||51||3.1%||62||22%||Hold|
|Cisco Systems (CSCO)||7/27/21||55||2.4%||63||14%||Hold|
|Coinbase Global (COIN)||11/30/21||321||0.0%||253||-21%||Sell|
|Devon Energy (DVN)||12/28/21||45||1.0%||45||0%||Buy|
|Floor & Décor (FND)||7/13/21||108||0.0%||129||19%||Hold|
|Marvell Technology (MRVL)||8/10/21||60||0.3%||89||48%||Buy|
|Sea Ltd (SE)||1/21/20||—||—||225||—||Sold|
|Sensata Technologies (ST)||6/15/21||59||0.0%||62||5%||Buy|
|U.S. Bancorp (USB)||9/21/21||57||3.2%||57||1%||Buy|
|Veeco Instruments (VECO)||10/12/21||23||0.0%||30||29%||Buy|
|Verano Holdings (VRNOF)||11/16/21||13||0.0%||13||-2%||Buy|
The market is kicking off the new year with a good up day (which is not uncommon for the first of the year) and many of our stocks are hitting new highs, which is great. But there is one notable laggard, and that’s Coinbase (COIN), which is also our biggest loser. As all long-time readers known, cutting losses short is almost a religion for me, so out it goes. Details below.
Changes Since Last Week’s Update
Coinbase (COIN) to Sell
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. Last week in Cabot Growth Investor, Mike wrote, “AMBA has made the roundtrip from looking great to looking iffy a couple of times this month, thrashing between 180 and 230 (round numbers), though after its latest bump higher, shares are beginning to settle down a bit, which is a plus. Fundamentally, nothing has changed here, with the odds favoring years of big growth as the firm’s computer vision chips are adopted en masse by many automakers (especially electric vehicle makers, which have far more cameras) and next-generation security camera makers, both of which allow for much greater automation. We will say that next year’s earnings estimate (up only 21%) is a bit light, though we think that’s most due to near-term supply-chain worries—and, at day’s end, Ambarella generally surpasses those estimates, so the real figure could prove to be much larger. The next big event comes next Tuesday, when the firm will host an Investor Day; any 2022 (or longer-term) forecast and/or deal announcements have the potential to move shares. As always, we’ll take it as it comes—a drop back to its recent lows would be a yellow flag, though a solid rally on good news could have us restoring our Buy rating. Right here, though, we’ll stay on Hold and wait for the stock’s reaction.” HOLD
Bristol Myers Squibb Company (BMY), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Growth/Income Portfolio, has been trading in a narrow range over the past two weeks, consolidating its big gains of the previous month. Bruce did no update in the holiday week, but he still has it rated buy, with a price target of 78. BUY
Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has been super strong since announcing excellent third-quarter results a month ago. In his update last week, Tom wrote, “This technology stock was added to the portfolio in February and was a dog until October. Since the beginning of October, AVGO caught fire and rallied 43%. It continues to move higher at a faster pace and has been making a series of new all-time highs.” BUY
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, broke out to a new high today! In his latest update, Tom wrote, “This infrastructure partnership is in an unmistakable longer-term uptrend, albeit a bouncy one. Year to date, the returns have been on par with the overall market. But this has been a raging bull market and BIP is a defensive stock that is less volatile that the market in general.” HOLD
Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, hit another new high last week! Bruce didn’t do an update in the holiday week, but his price target is 66. And you should note that if the stock gets there, Bruce won’t automatically sell; he’ll reevaluate and perhaps raise the price target. HOLD
Coinbase (COIN), originally recommended by Tyler Laundon in Cabot Early Opportunities, operates an exchange where all the big cryptocurrencies are traded, so prospects for growth as the industry expands are enormous. But the stock remains our biggest loser, and shows no sign of turning up, so the best thing to do is sell and move on. SELL
Devon Energy (DVN), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, is up today and close to hitting a new high. In his update last week, Mike, wrote, “Despite a rush of new virus cases and news that the Fed is quickening its tapering schedule, oil prices could ‘only’ dip as low as $65 per barrel (closing basis) in early December and $69 last week before spiking back into the mid-$70s in recent days. That, of course, keeps the tremendous cash flow story for Devon very much intact. In fact, despite the worries out there, the numbers suggest that Q4 is likely to be more fruitful than Q3: Oil prices have averaged about $7 more this quarter than in Q3 ($77 vs. $70 or so), while natural gas prices averaged about 40 cents more than the prior quarter (~$4.80 so far in Q4 vs. $4.40 in Q3). Whatever that means for the dividend (announcement likely in early February), it’s clear big investors think good things are coming—DVN has spiked to new highs in recent days, a sign that perception of the dividend, share buyback and debt reduction story continues to gain steam. (Since the peak in oil prices in late October, crude is down about 8%, but DVN is actually up around 12%—another telling sign.) Near-term virus news could move DVN and the sector, but it certainly looks like the stock wants to continue higher. We’ll stay on Buy, though as always, aiming for dips is best for new buyers.” BUY
Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, remains in its long uptrend, though it hasn’t hit a high since the first week of November. In his update last week, Mike wrote, “FND tickled our mental stop in the upper 110s a few days in a row two weeks ago, but it closed above it each time and has since rallied 10 points or so, which is obviously good to see. Looking at the overall picture, we think it’s possible FND is ready to move—at last week’s lows, shares had made no net progress for eight months (wearing out the weak hands with lots of ups and downs) and tagged their 40-week line, which is a support line that’s kicked off some solid rallies for the stock in the past. Fundamentally, there’s no doubt cost inflation and supply-chain issues could be bugaboos, but those worries are well known; if indications show up that those problems are easing, the stock could look ahead to re-accelerating earnings growth. Long story short, we’re optimistic, but we need to see other investors agree with us (pushing the stock higher) to conclude the next upmove has begun. Hang on if you own some, with a mental stop just under 120.” HOLD
Marvell Technology (MRVL), originally recommended by Carl Delfeld in Cabot Explorer, continues to consolidate the huge gains that came after the company reported excellent third-quarter earnings in early December. Carl had nothing new to add last week but remains bullish on this firm that is a key supplier to seven out of the top 10 automotive original equipment manufacturers. BUY
Sensata Technologies (ST), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, remains in a trading range, setting up for a breakout (eventually) above its March high of 65—and chances are good it’s coming, because the stock has been up for the past eight days and is still moving up today. Bruce did no update last week. BUY
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, last week reported that fourth-quarter deliveries totaled 306,000 vehicles, far higher than analysts’ estimates of 263,000. For the full year, the company delivered over 936,000 vehicles, an astounding 87% more than the previous year. That would be an impressive feat in any year, but it was particularly so in 2021, when so many automakers were constrained by chip shortages. The stock is up 10% as I write—technically still in the basing phase following its surge after reporting third-quarter results. 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. As you wait, you get a nice 3.2% dividend. 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—and the stock is hitting new highs today! In his update last week, Carl wrote, “Revenue growth for 2021 is expected to be up 30% and even better for earnings. 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, is up 30% from its recent low and going in the right direction. As the fifth of the top five vertically integrated multistate operators, and the youngest stock as well, VRNOF is less well known than the most famous cannabis companies and the upside of that is that as it gets “discovered,” new buyers can push the stock higher. Additionally, the company has stronger adjusted EBITDA margins than its competitors, which is an indication of very good management. BUY
Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier and featured here two 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.” 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 new highs last week, so the trend still looks great. BUY
The next Cabot Stock of the Week issue will be published on January 10, 2022.