July 12, 2021

The bull market remains intact, so I continue to recommend that you be heavily invested in stocks that help achieve your investing goals.

Today’s featured stock is a consumer stock with a classic cookie-cutter story, which brings the possibility of extended long-term growth.

As for the current portfolio, to keep it at our maximum level of 20 stocks, we’re parting company with long-time holding Huazhu Group (HTHT), for a variety of reasons.

Details inside.

Lastly, I hope you’ll join me for the 9th Annual Smarter Investing, Greater Profits Online Conference, August 17-19. We have an incredible lineup of experts ready to share their best picks.

Cabot Stock of the Week 356

The bull market is alive and well, and I continue to recommend that you be heavily invested in stocks that help meet your goals—while remaining prudently diversified. Someday, of course, this will change. The broad market will stop going up and start going down. And while I will continue to recommend one stock per week, I will recommend that you be more cautious about buying, that you be less patient with underperformers, and that you take losses more quickly. But that time is somewhere in the future. For now, the portfolio remains fully invested. Today’s recommendation, a classic type of growth stock, was originally recommended by Mike Cintolo in Cabot Growth Investor and here are Mike’s latest thoughts.

Floor & Décor (FND)
I started working at Cabot back in 1999, and as a growth investor, it’s no surprise that many of the big winners we’ve landed since then have come from the technology and medical arena—from XM Satellite and Taser to First Solar to Baidu, Shopify, Celgene, Twilio, DocuSign, DexCom, Okta and more, technology and medical will always be areas I screen heavily to find new leadership.

But truth be told, my favorite area to invest in is retail, for a couple of reasons. First, retail is almost always easier to understand than a cloud company or some firm with a fancy medical drug or device, which in turn means it’s easier to have conviction—and that means you can hold onto the stock for its entire move. Second, successful retail plays (especially what legendary investor Peter Lynch dubbed cookie-cutter stories) are typically capable of rapid and reliable growth for many years, which is like catnip for institutional investors.

Floor & Décor is currently one of our favorite retail cookie-cutter stories out there, and it has all the characteristics of a stock that should do very well over time. Fundamentally, the big idea is that the company is upending the hard-flooring retail industry; at the end of Q1, Floor & Décor operated 140 warehouse-style stores that have everything professionals and DIYers need. Whereas the typical competitor might have a couple hundred different products available in-house, Floor & Décor has 1,400 or so, allowing customers to see/touch/feel/buy whatever they want right away.

About one-quarter of sales are floor tiles, a quarter-plus or so are laminates, while wall tile, wood, natural stone and decorative accessories make up another third or so. Longer term, of course, there’s a shift away from soft flooring (read: carpet) and toward hard flooring, too, which means the firm’s potential market is growing even faster than, say, the general housing and renovation market, which is itself booming.

Not surprisingly, clients have flocked to Floor & Décor’s offerings; except for the very occasional quarter, same-store sales have been in the black, and often in double digits. Moreover, the firm’s store economics (payback of the initial investment within two to three years; EBITDA in the third year of being open generally equals 50% of the initial investment!) have allowed management to embark on an aggressive store expansion plan.

Specifically, the top brass generally aims to increase the firm’s warehouse count by 15% to 20% annually, and they see the potential for at least 400 locations in the U.S. alone. Given that Floor & Décor had just 140 warehouses open at the end of Q1, there’s obviously years of rapid store growth ahead, and that doesn’t even account for the likelihood that management’s target of 400 locations is probably conservative. Indeed, for this year, the company is aiming to open 27 new locations (just over 20% growth from year-end 2020), and seems on track, with 13 announced openings by the end of June.

Put it all together and you have a long-term growth story that has played out for years (earnings have advanced solidly every year since at least 2014, including last year’s healthy 30% jump), and there’s no reason that can’t continue for a long time to come. Granted, some of the recent numbers (sales up 41%, same-store sales up 31%, earnings up 100% in Q1) are a bit inflated due to the easy comparisons from a year ago, but given the store expansion plan and history of execution, there’s no reason the company can’t crank out 20% to 30% annual growth for many years to come.

Interestingly, while Floor & Décor was growing steadily, the stock did nothing from April 2018 through July 2020, when it broke out above 60. That run took the stock to 100 by December, but after that, shares chopped around; for six and a half months, FND made no net progress. But we think that’s changing now, with shares bouncing off their 40-week line on good volume and heading higher since. There will likely be wiggles, but we believe there’s a good chance the next upmove has started. BUY

Current Recommendations

The portfolio as a whole is acting well, with no obvious candidates for sale. But the addition of FND means something has to go, and the victim this week is one I’ve contemplated for a long time, HTHT, which has been in the portfolio for more than five years. Portfolio management is both a science and an art, and no one solution is right for everyone, but the goal of my examples and explanations is to help you manage your own portfolio. Details below.

Changes
Maravai (MRVI) to Hold
Huazhu Group (HTHT) to Sell
Pinduoduo (PDD) to Hold

ASML Holding (ASML), originally recommended by Mike Cintolo in Cabot Growth Investor, is a Dutch manufacturer of high-end photolithography machines in high demand by semiconductor manufacturers—which, as we all know, are working full speed to fill the world’s demand for chips. The stock looks absolutely fine, hanging around the 700 level and prepared to break out to a new high. BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, peaked at 495 back in mid-February, and the stock has been working to break through that level since. In his issue last week, in which Tom highlighted the stock as particularly attractive given this setup, he wrote, “Broadcom is a global infrastructure technology leader and an industry Goliath with $24 billion in annual net revenues. It’s an icon of the technology revolution with roots that trace back over 50 years to the old AT&T/Bell Labs. The company has many category-leading products in semiconductors and infrastructure software solutions.

[Today] there are two simple reasons for buying the stock. One, it is benefitting from the current environment as more businesses move online and into cloud-based applications. Two, it will get a huge benefit from the 5G rollout in the short and near term.

In the last reported quarter, overall revenues rose a solid 15% and wireless revenues soared 48%, primarily because of the launch of the new Apple 5G phones, which require more filters and other networking technology. That boost should continue in the quarters ahead.

At the current price, AVGO pays a 3% yield. That’s solid, especially considering the current low-interest-rate environment. But the growth potential of the dividend is the main event. Over the past three years, AVGO grew the payout by a staggering compound annual growth rate (CAGR) of 177%. The annual dividend grew from $1.94 in 2015 to $14.40 at the current rate.

Demand for products in cellular connectivity, networking and data centers is sharply on the rise and should continue to grow for some time. Broadcom is the one of the best in the business at providing the products that enable such things. More and more devices will need to connect to the internet and interact with each other as new 5G technology launches technological innovation and the digital economy to another level.

The timing seems great for AVGO, and the price is still reasonable, selling at just 18 times forward earnings. The stock is a great way for more conservative investors to play in the technology sandbox while getting a growing dividend.” BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has pulled back minimally from the new high it hit last week. In his update then, Tom wrote, “This infrastructure partnership is another slow-mover that has broken out to a new high this week. After going sideways for several months, BIP has moved about 6% higher over the past few weeks and has been making a series of new highs over the last week. Business is solid and earnings should get a boost this year from new acquisitions and a recovery in its transportation assets. It looks like BIP is benefitting from the market trending towards undervalued dividend stocks.” BUY

Five Below (FIVE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to work at breaking out above resistance at 200 that has constrained it since January. From a long-term perspective, that rest looks well-deserved, as the stock was at 100 less than a year ago. HOLD

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, hit a high of 64 in early June and has pulled back normally since. In his update last week, Bruce wrote, “GM announced that it is investing in a geothermal project in California to provide a source of lithium for its EV batteries. Second quarter U.S. light vehicle sales matched the second quarter 2019 volume (the last year prior to the pandemic). GM and Toyota tied for the #1 spot, as GM was hurt by the chip shortage while Toyota’s chip stockpile helped its volumes. Average prices surged, due to limited supply, high demand and high used-car prices. GM shares have 20% upside to our recently raised 69 price target. On a P/E basis, the shares trade at 8.4x estimated calendar 2022 earnings of $6.87.” HOLD

Huazhu Group Limited (HTHT), originally recommended in Cabot Explorer, has been in the portfolio for more than five years, and brought a very nice profit over that time. For a long time, I’ve simply rated the stock hold, mainly as a way of illustrating the power of holding a good growth company long term. As the biggest hotel operator in China, Huazhu can take advantage of the cookie-cutter effect that Mike Cintolo described above. But today I’m going to sell it, for a combination of reasons. One, because I believe most readers know the power of holding a growth stock long term. Two, because the stock takes up space in the portfolio that I’d like to use for more current stocks. And three, because last week the stock, like many Chinese stocks, weakened as the Chinese government cracked down further on stocks that trade on U.S. exchanges, and that’s not a good trend. If you own HTHT with a big profit, I suggest you consider selling some here, but I don’t think there’s any rush. SELL

HubSpot (HUBS), originally recommended by Tyler Laundon in Cabot Early Opportunities and then by Mike Cintolo in Cabot Top Ten Trader, hit another new high last week. I’m going to leave it rated buy for consistency’s sake, but I recommend deferring buying until the stock pulls back a little more. BUY

Maravai (MRVI), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here last week, fell below its 50-day moving average and that means it deserves a downgrade to hold. These young stocks can be volatile, so the dip isn’t unusual, but if the stock doesn’t recover soon, we won’t stick with it. HOLD

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, continues to correct, but Bruce says that higher prices are still ahead. In his update last week, he wrote, “Molson is estimated to produce about 5% revenue growth and a 1% decline in per share earnings in 2021. Profit growth is projected to increase to a 6-8% rate in future years. Weakness this year is closely related to the sluggish reopening of the European economies, along with higher commodity and marketing costs. The company will likely re-instate its dividend later this year, which could provide a 2.7% yield. TAP shares have about 34% upside to our 69 price target. The shares trade at 13.3x estimated 2021 earnings of $3.89 (down a cent this past week). Estimates for 2022 were unchanged.” HOLD

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, peaked at 88 in January and bottomed at 68 in February and though the stock has not been strong lately, the pattern of higher lows that it’s established since that bottom is encouraging. In his lastest update, Tom wrote, “This combination regulated and alternative energy utility had been adored by investors for years, until recently. NEE ran out of gas in late January, then recovered and fell back again. But things haven’t changed fundamentally. The company continues to grow earnings at a high clip as the alternative energy business become more profitable. Plus, the environment ahead will likely be even better for NEE than before as the new administration showers clean energy companies with subsidies and tax breaks and other goodies. It’s also a high-growth sector that should get more attention.” BUY

Nvidia (NVDA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a new high last Wednesday and has pulled back normally since. Momentum investors can still buy here, but more risk-averse investors should wait for a pullback, perhaps to the 50-day moving average. BUY

Palantir Technologies (PLTR), originally recommended by Carl Delfeld in Cabot Explorer, peaked at 45 in January, bottomed at 17 in May, hit 27 in late June, and has just pulled back to its 50-day moving average at 23, which looks like a great entry point. In his update last week, Carl wrote, “Palantir shares were hit hard this week, falling from 26.8 to 22.8, but I believe the story is intact. Its software is used by government agencies in a wide range of applications. In the recent first-quarter report, management disclosed that U.S. government revenue had grown 83% year over year. Palantir has signed various sizable government contracts in the past six months. And the company sees plenty of room to expand into the commercial sector. I encourage you to buy shares if you have not already done so.” BUY

Pinduoduo (PDD), originally recommended by Carl Delfeld in Cabot Explorer, and featured here last week as it had pulled back 47% from its high, has pulled back some more, which means it might be an even better buy. It’s tempting. But as the ascribed reason is political, Carl thinks it’s more prudent to refrain from buying here. In his update last week, he wrote, “Shares tumbled from 128 to 110 this week as the stock was caught in the controversy regarding DiDi and the crackdown by both Chinese and American regulators. I’m moving this to a hold pending some clarification on this issue and hoping for a possible bounce-back in the coming week. Pinduoduo’s secret sauce in China’s discount marketplace is a platform that allows shoppers to team up for group discounts. This strategy relies on users sharing links across social networks in China. The company continues to post impressive growth. Pinduoduo’s revenue surged 97% in 2020, then jumped another 239% year over year in the first quarter of 2021 to reach $3.3 billion. We need to watch this stock carefully to see if it can recover some ground this week as Chinese stocks are coming under increased scrutiny.” HOLD

Progyny (PGNY), originally recommended by Mike Cintolo in Cabot Growth Investor, peaked at 67 in mid-June, and since then has been on what is probably a normal correction. In his latest update, Mike wrote, “PGNY has been fighting to hold onto its 50-day line for the past couple of weeks, and today was another stick save on that front. Fundamentally, we see rapid and reliable growth for a long time to come, and chart-wise, the recent pullback, while never fun, has been normal. Hold on if you own some, and if not, this should be a good entry point.” BUY

Roblox (RBLX), originally recommended by Mike Cintolo in Cabot Growth Investor, is a young and volatile stock, and we still have no profit, but the correction looks normal to this point. In his update last week, Mike wrote, “RBLX tested its 50-day line for the second time in three weeks today, and again it found support. Could the tedious correction be coming to an end? We’re hopeful but need to see more—and we still think a lot will come down to any monthly updates that are released (possibly in the middle of July, though that’s not a certainty) that point to whether (a) user growth continues to slow and (b) whether it’s affecting revenue growth much. (Remember, while users were down 1% sequentially in May, revenues were up 4% from the prior month.) If things go right, we very much believe RBLX can be a good-sized winner given its unique offering, but we’ll let the stock tell the tale. Hold for now.” HOLD

Schlumberger (SLB), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains below its 50-day moving average today, but the stock still has an intact pattern of higher highs and higher lows. BUY

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, bounced off its 50-day moving average last Thursday and is now back above its 25-day moving average, ready to hit another new high. In Carl’s latest update, he wrote, “Sea shares have, over the last six months, exploded from 196 to 282, but this week pulled back to 268. We have taken profits several times over the past two years with this impressive growth stock. It benefits greatly as a fintech leader in the fast growth markets of Southeast Asia. Long-term holders may wish to add some shares at this level.” BUY

Sensata Technologies (ST), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, hit a high of 64 in mid-March, and has been building a base at the 60 level since then, but will almost certainly break out to new highs eventually. In his update last week, Bruce wrote, “Sensata is a $3.8 billion (revenues) producer of an exceptionally broad range (47,000 unique products) of highly engineered sensors used by automotive, heavy vehicle, industrial and aerospace customers. Revenues this year are projected to increase by about 24%, driven by a cyclical rebound, then taper to a 6% rate in future years. Despite the apparent strength, this year’s results are being constrained by the semiconductor shortage. Expected profit growth of 54% in 2021, also boosted by the recovery, is estimated to taper to about 10-20% in future years. Sensata’s balance sheet is strong. Its $4 billion in debt is partly offset by nearly $2 billion in cash, with its net debt at only 2x EBITDA (a measure of cash operating earnings). This is arguably too conservative given the company’s franchise and wide 20%+ operating profit margin. ST shares have about 31% upside to our 75 price target. The stock trades at 14.1x estimated 2022 earnings of $4.04 (unchanged this past week). On an EV/EBITDA basis, ST trades at 11.1x estimated 2022 EBITDA.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been riding its 200-day moving average higher since mid-May, and I still think it’s a good buy at this level. CEO Elon Musk is in the news this week as he testifies about the acquisition of Solar City back in 2016, but the results of the trial are unlikely to have a major effect on the company or the stock. The key factors for the stock today (aside from the general bull market) remain the pace of the company’s global expansion as it leads the race to move the automotive world away from fossil fuels and the pace of the world’s competitors, who just last year realized the revolution was progressing faster than they expected—plus Tesla’s moves to revolutionize the energy industry with a combination of solar panels, batteries and intelligent software. BUY

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, is one of the four leading cannabis companies in the U.S., as measured by revenues, but the number one leader as measured by profitability, mainly because it focused solely on Florida in its early years. The sector had been weak since peaking in February, but TCNNF bottomed at 34.5 on April 20, and since then it’s been building a base, working its way slowly higher on top of its 200-day moving average. Last week management announced the start of planting in West Virginia, making it the first medical marijuana operator to begin operations in the state. BUY

The next Cabot Stock of the Week issue will be published on July 19, 2021.

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