January 4, 2021

The market sold off broadly this morning, and it certainly needed it. The market has been too strong for too long! But the main trend remains up and thus I continue to recommend that you be heavily invested.

Today’s recommendation is a search technology company with fast growth and great growth prospects, first recommended by Mike Cintolo.

As for our current holdings, I have two sell recommendations today, B&G Foods (BGS) and Zoom Video (ZM).

Full details in the issue.

Cabot Stock of the Week 329

After closing out 2020 with a bang, delivering profits that were inconceivable in the depths of the March selloff, the broad market turned down today—and could very easily continue lower far longer, eventually turning our market timing indicators negative and leading us to raise cash. But that’s only speculation, based in part on the very high levels of sentiment among investors in recent weeks. For now, I’m sticking to our bullish course because the main trends are still up. And today’s recommendation is a strong one, a search technology company that’s providing great value to big companies in all sorts of fields. The stock was originally recommended by Mike Cintolo in Cabot Top Ten Trader and here are Mike’s latest thoughts.

Elastic (ESTC)
When you think of search, your first thought is probably of Google, the 800-pound gorilla of Internet search. But that area is really just a small fraction of the search “sector” so to speak. There’s searching within websites for apps, content and more, searching for data on enterprise networks, searching for cybersecurity, server and digital infrastructure activity that could point to vulnerabilities or inefficiencies, you name it. And as opposed to Google, the vast majority of this data isn’t found in neatly laid out websites, instead coming in various forms (logs, metrics, structured and unstructured).

That’s where Elastic comes in. The company has a better mousetrap in the never-ending goal of getting the most (and best) actionable insights from data. In fact, in the firm’s own words, “Elastic is a search company that applies the ability to instantly find relevant information and actionable insights from any data to a diverse set of applications and use cases.” In other words, it makes data usable, quickly, providing relevant results even in massive and growing databases.

It all starts with Elasticsearch, which can take data from any source in any format and allow users to store, search and analyze it in real time. Then there’s Kibana, which is effectively a visualization engine, allowing users to set up dashboards, create live presentations and more. Then there’s Beats, which is a collection of platforms that sit on servers and ship data to Elasticsearch, as well as Logstash, which looks at a multitude of sources and adds structure to the data, making it more valuable.

Together, these products are known as the Elastic Stack, and they offer clients the best of enterprise search (finding documents, website results, app data, etc.), observability (analyzing logs, metrics, application performance and uptime) and security (threat prevention and detection). In fact, one of the things that’s always impressed us about Elastic is how its products are applicable to so many firms across industries and use cases, especially among big, global operations that use its products behind the scenes.

For example, Adobe uses Elasticsearch for many offerings, especially involving image search. T-Mobile uses it to make its mobile app more useful. Audi uses it to analyze operations in some groups, reducing costs and increasing flexibility. Pfizer uses it to better search their data involving manufacturing. Airbus uses it to search digital documents related to supply chain and customer service. Zurich uses it to better analyze claims and contact records for agents. Proctor & Gamble uses it to analyze the massive amount of data it collects every day. And Wal-Mart, the U.S. Air Force and Softbank all uses Elastic’s offerings to help with their data and network security.

All told, management thinks it’s playing in a $78 billion market, up from $45 billion just a few years ago, and the firm is making quick progress toward capturing a huge share of that. While growth has slowed a bit, the top line expanded 43% in the most recent quarter, with cloud-based revenue up 81% from last year. (Cloud revenue makes up just a quarter of revenue, but more than 90% of business is still subscription-based.) More impressive are the sub-metrics, including a 24% gain in six-figure-contract customers and a same-customer growth rate north of 30% for many quarters in a row.

As for the stock, it seems early-stage; ESTC spent more than a year base-building, with the stock making no net progress from March 2019 to early November of last year. But the action since then has been impressive, with a big-volume breakout five weeks ago, a nice upside follow-through after that and a reasonable pullback toward the 25-day line last week. These types of pullbacks coming soon after a solid breakout are usually great opportunities, and that’s our bet with ESTC.

Current Recommendations

Overall, our holdings continue to perform very well—but I continue to recommend that you consider taking partial profits in some, because there is a major correction ahead, somewhere. As for outright sells, I have two today, B&G Foods (BGS) and that star of pandemic videoconferencing, Zoom Video (ZM). Details below.

Changes
B&G Foods Inc. (BGS) to Sell.
Virgin Galactic (SPCE) to Hold.
Zoom Video (ZM) to Sell.

B&G Foods Inc. (BGS), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, got as high as 31 on December 23, but the sellers have been in control every day since, taking the stock down on high volume to below its 50-day moving average and taking away our modest profit. Key to the selling may be the news (announced on that peak day) that the company was voluntarily recalling containers labelled garlic powder because they are really containers of bacon-flavored bits (which contain soy) and that that soy may pose a life-threatening risk to indiduals with soy allergies who see no mention of soy on the garlic powder label. (Obviously, if the label says garlic powder but the container holds bacon bits, something is wrong.) Tom is sticking with the stock long-term; he still thinks the dividend is safe. But for this portfolio, we can’t be that patient. I’m selling now and moving on. SELL.

Berkeley Lights (BLI), originally recommended by Tyler Laundon in Cabot Early Opportunities, has pulled back to its 50-day moving average over the past seven trading days and this looks like a nice entry point if you haven’t bought yet. Berkeley has great long-term prospects in the business of supplying equipment for harvesting, culturing, imaging, sequencing and characterizing cells. BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, pulled back with the market today but the stock’s long-term uptrend remains quite intact as it works to return to (and eventually exceed) its February high of 58. In his update last week, Bruce wrote, “Relatively new CEO James Quincey (2017), is a highly-regarded company veteran with a track record of producing profit growth and making successful acquisitions. To improve its global operations, Coca-Cola is reorganizing to become more effective and more efficient, refocusing its innovation efforts and culling its portfolio of over 400 brands by 50% to focus on its highest-priority offerings. Coke is also centralizing and standardizing back-office administrative services. The company is working to improve its image (and reality) of selling sugar-intensive beverages that are packaged in environmentally-insensitive plastic. Coca-Cola’s sturdy balance sheet carries $53 billion in debt that is well-covered by cash flow and partly offset by over $21 billion in cash. The $0.41/share quarterly dividend is also well-covered by solid free cash flow. Barron’s recently featured the company in an article about its “Top Stock Picks for the New Year”, with favorable comments similar to our thesis. The stock has about 18% upside to our 64 price target. While the valuation is not statistically cheap, at 25.5x estimated 2021 earnings of $2.12 and 23.2x estimated 2022 earnings of $2.33 (estimates unchanged in the past week), they are undervalued while also offering an attractive 3.0% dividend yield.” BUY.

Columbia Sportswear (COLM), originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, pulled back with the market today but remains in an uptrend. In his update last week, Bruce wrote, “Holiday retail sales were reported to be +2.4% from a year ago, based on online and in-store spending using all forms of payments. This growth was slightly below estimates from the National Retail Federation for a +3.6% to +5.2% increase. The results were described as being disappointing, but given everything that has happened this year, we consider this aggregate estimate to be a positive. As an aggregate estimate, it is meant to include all of retail except vehicles and gasoline, so it will not necessarily be a valid indicator for any particular company. However, we are not highly optimistic that Columbia had a strong quarter given the importance of mall-based stores, which had a weak holiday showing. Still, expectations are fairly low, and we see no reason to offload the stock. Columbia’s shares have about 15% upside to our 100 price target. The shares trade at 23.7x estimated 2021 earnings of $3.67. The earnings estimate fell about 1% from last week. For comparison, the company earned $4.83/share in 2019.” BUY.

CrowdStrike (CRWD), originally recommended in Cabot Growth Investor by Mike Cintolo, was at record highs two weeks ago and has pulled back moderately since. In last week’s issue of Cabot Growth Investor, Mike wrote, “CRWD has pulled in this week, but it’s still off to a good start for us, thanks to a little luck—the headline-grabbing SolarWinds hack a couple of weeks ago boosted perception of all cybersecurity names, and it looks like big investors see CrowdStrike as the biggest beneficiary. Indeed, SolarWinds actually deployed the company’s platform to protect its endpoint devices in the wake of the breach, and it’s thought that the same hackers tried to breach CrowdStrike’s systems (through a reseller) but failed! Business was already strong, of course, and the thought is that this hack will only increase the need for the firm’s offerings going forward. As for the stock, we think the three straight big-volume up weeks out of the October/November rest is a sign CRWD wants to go higher after it shakes out some weak hands. We’re not in a rush to fill out our position right here—we’d like to see the stock find some support and calm down a bit—but if you don’t own any, you could buy a half-sized position around here or on further dips.” BUY.

General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, has been riding its 50-day moving average over the past few weeks, trying to build a base in the 40-42 area. In his update last week, Bruce wrote, “If true, rumors about Apple launching an electric vehicle in 2024 could rattle the industry. Apple has vast financial resources, a top-notch reputation for quality/ease of use/innovation and clear technological prowess. Such a competitor would change the dynamics of the industry and create a worthy rival for Tesla, GM and all electric vehicle producers and wanna-be’s. However, we think their entrance is unlikely unless they can outsource the capital-intensive production (perhaps to Magna?). Another variant is that Apple could partner with Tesla or other producer(s) to have the Apple operating system (OS) or entertainment/communications system built into the manufacturer’s cars – essentially making the car an iPhone. There are lots of possibilities here. GM recently sold its car-making factory in Russia to Hyundai. Whether Hyundai can succeed there is debatable, given how difficult it can be for any car maker to operate there. Yet, while the transaction size is likely small (GM closed the factory in 2015 when it left the Russian market), the deal points to the increasing ambitions of competitors like Hyundai to fill in markets where former powerhouses like GM used to participate. Competitor Nissan is struggling for its future, as it faces strategic difficulties from years of management disarray. It remains a laggard in electric vehicle technology and profits from its one-size-fits-all product roster will likely struggle as car markets become more regionalized based on local regulations and consumer preferences. GM’s approach of exiting distant and difficult markets (like Russia) reflects this trend. GM shares have about 18% upside to our recently-raised 49 price target. GM shares trade at 7.0x estimated 2021 earnings of $5.98. Our 49 price target can be thought of as assuming a 7x multiple of $7.00 in earnings. The 2022 estimate is already at $6.49, so a few strong quarters (which GM is capable of) would likely raise estimates enough for the shares to reach our target.” 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. Since hitting a record high near 54 a few weeks ago, the stock has pulled back to just under its 50-day moving average and found support at 44. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, is up over the past two weeks and remains well above its 50-day moving average. In his update last week, Bruce wrote, “Investors’ primary worry about Molson Coors is its lack of meaningful (or any) revenue growth as it has relatively few of the fast-growing hard seltzers and other trendier beverages in its product portfolio. Our view is that the company’s revenues are resilient, it produces generous cash flow and is reducing its debt, traits that are value-accretive and underpriced by the market. A new CEO is helping improve its operating efficiency and expand carefully into more growthier products. We anticipate that the company will resume paying a dividend mid-next year, perhaps at a $0.35/share quarterly rate, which would provide a generous 3.1%. TAP shares have about 30% upside to our 59 price target. Estimates for 2020-2022 continue to move up and down by a few cents from week to week. TAP shares trade at 10.9x estimated 2021 earnings of $4.18. 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 8.2 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, climbed back above its 50-day moving average last week so the main trend remains up. In his latest update, Tom wrote, “This regulated and alternative energy utility juggernaut has returned 26% YTD while the utility sector is in negative territory for the year. It’s also significantly outperformed the S&P 500 this year, as it has for the past 3 year, 5 year, 10 year and 15 year periods. I don’t see any reason why the stock wouldn’t continue to outperform going forward. Alternative energy is only getting more profitable and more popular with investors.” HOLD.

Nuance Communications (NUAN), originally recommended by Tyler Laundon in Cabot Early Opportunities, looks quite good, having hit a peak of 45 two weeks ago and pulled back minimally since. Nuance is a leading voice-recognition company, with good long-term prospects, but if you don’t own yet, I recommended waiting for a real pullback. BUY.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, has corrected normally over the past two weeks and today bounced off its 50-day moving average. In his update last week, Mike wrote, “PINS has lost some upward momentum of late, and that’s led to some downside this week, with the stock cracking its 25-day line for the first time since September. Even so, we’re fine with the action—we’ll see how it goes, but a trip to the 50-day line (now near 64) should offer a solid entry point, especially if the market weakens a bit from here. That said, we’re not complacent after a big run, either (if you have a loss or little profit, a stop in the low 60s makes sense), but we have a good-sized gain, have already booked partial profits and think the stock has lots of upside down the road. (Also, going along with our lesson later in this issue, one thing we learned this year is to try to give early-stage names that we’ve already booked some profits in plenty of rope to resume their advance.) Long story short, the near-term could provide some more rockiness, but we’re holding our stake, and if you don’t own any, you can grab shares here or on further dips.” BUY.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor and now recommended by Tom Hutchinson in Cabot Dividend Investor, sold off four weeks ago on news of Apple developing its own modems (which Qualcomm currently provides), but the stock has been trending higher since. In his update last week, Tom wrote, “The stock is still very much in a strong uptrend ahead of a year where the economy should recover strongly and 5G may take center stage and be the major market story.” BUY.

SABESP (SBS), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer and featured in our last issue two weeks ago, is off slightly since then and that just makes it a better buy. If you’re looking for a low-risk investment today, it’s a good choice. In his December 31 update Carl wrote “SABESP is a conservative water play in Brazil. This is a great monopoly opportunity that is majority owned by the state of Sao Paulo. The company provides water and sewage services to over 26 million people in 365 of the 645 municipalities in the State of Sao Paulo. I like SABESP because the company has 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 in 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, bounced off its 50-day moving average at 180 a week ago and is now aiming at its early-December high of 210. In his update last week, Carl wrote, “Shares have lost some momentum over the past month as it recently completed a secondary stock offering that raised at least $2.57 billion. The company now has a market value of 100 billion and a share price of 197 – a far cry from the 15 per share price at which we began our position in February 2019. The only recent news is that the company announced it has been granted a license to operate a full-service digital bank by the Monetary Authority of Singapore. This is a big deal and I would again recommend that investors take some profits here, but this story will likely continue into 2021. Sea is Southeast Asia’s biggest gaming, e-commerce, and payments company, with more 40 million daily active users in a region populated by 655 million consumers.” HOLD.

Taiwan Semiconductor (TSM), originally recommended by Carl Delfeld of Cabot Global Stocks Explorer, is one of the strongest stocks in the portfolio today, closing at record highs in five of the past six trading days. In his update last week, Carl wrote, “Shares have added 5 points to reach 109 as its struggling U.S. competitor Intel is coming under pressure to address its falling further behind in the semiconductor fabrication rate. Taiwan Semiconductor dominates global chip making and benefits from secular trends of advanced computing and 5G going into next year and beyond. The chip-making business is both capital and brain intensive with half the company’s workforce having postgraduate degrees. The company delivered an impressive return on equity of 31% in its most recent quarter. I maintain a buy rating on the stock.” BUY.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is even hotter than TSM, partly because it was recently added to the S&P 500, partly because of short-covering and partly because the company is now widely acclaimed as the leader of the automobile business as the industry pivots to electric cars; it delivered nearly 500,000 cars in 2020. But I wouldn’t buy the stock here. With a gain of 1,950% since its 2019 low, TSLA is ripe for a pullback. Still, I’m holding long-term, because TSLA has even greater potential as a leader in the massive energy business. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, remains very close to its recent high, thanks to continued buying of marijuana stocks by retail investors. In my update last week, I wrote, “The biggest seller of marijuana in Florida, with a 51% market share and a record of profitability since 2017, Trulieve is a well-managed company with excellent prospects as it expands into other states (California, Massachusetts, Connecticut, Pennsylvania and West Virginia). Revenues aren’t growing quite as fast as at the sector leaders (Q3 saw $136 million, up 93% from the year before), but that record of profitability is impressive. And so is the chart, which has been trending strongly higher for three months.” Based on both technical analysis and sentiment, I feel about marijuana stocks the same way I feel about TSLA; they’re over-loved here and are due for a cooling-off period. HOLD.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, remains on a correction from its high of early December, but still above its 50-day moving average, so technically just fine. In last week’s update Mike wrote, “UBER looked a bit tenuous a couple of weeks ago, but after initially dipping below 49 on the new virus strain news, it’s found good support and, while it may need a little longer to rest (the 50-day line is near 47 and rising), we think the next major move is up. While there are always potential potholes in any story, it appears little is standing the way of a huge next few quarters for Uber. The combination of the vaccines and yet another stimulus package should goose the economy next year (helping the Rides segment), while the acquisition of Postmates and secular trends should keep the Delivery business humming. Analysts see cash flow getting to breakeven next year while revenues soar 42%, and both could prove conservative if worldwide economies really take off. If you don’t own any, you can buy UBER here.” BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, continues to inch lower, falling below its 50-day moving average last week. In last week’s update, Carl wrote, “SPCE shares have been in a holding pattern over the last few weeks since the company aborted a planned test flight of its spacecraft, delaying a key step needed for Richard Branson’s space tourism company to start commercial service. In addition to technical issues, according to data from the New Mexico Department of Health, new COVID-19 infections spiked in the days leading up to Christmas and this is also impacting work on all these issues. Virgin Galactic CEO Michael Colglazier recently outlined how, from just a single operational VSS Unity spaceplane today, flying out of Spaceport America in New Mexico, Virgin Galactic plans to build entire fleets of spaceplanes and to fly them out of multiple spaceports around the world, bringing in annual revenue of $1 billion. This is welcome ambition, but it will require eight craft each flying 50 flights per year as well as a higher price per ticket relative to the $250,000 set for the first 600 passengers. As the only pure play space tourism stock in the public markets, this remains your best way to play for exposure to this megatrend. Feel free to take some profits if you bought near the recommendation level, but given all the uncertainty regarding the timing of tests and then the launch of the spaceplanes, I’m going to move this stock to a hold.” I’ll do the same. HOLD.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had established support at the 375 level several times over the past few months, but fell through that level this morning, and that’s my signal to exit. Yes, long-term fundamentals remain strong, but this stock was the poster child for video-conferencing in 2020, and even after this pullback its PE is still a lofty 244. (If you like, you could take partial profits and see if long-term holding pays off). SELL.

The next Cabot Stock of the Week issue will be published on January 11, 2021.

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