July 19, 2021

The bull market remains alive and well, with major indexes hitting new highs in the last week. However, growth stocks in particular have been hit hard recently—finally spilling into the broad market in the last few trading days—and that requires some selling, so today we’re purging four of our weakest performers from the portfolio. As for new buying, today’s recommended stock is growing by consolidating a fragmented mature industry. It just came public this year, so it’s a name few investors are aware of. The stock was originally recommended by Tyler Laundon in Cabot Early Opportunities.

Details inside.

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Cabot Stock of the Week 357

The bull market is alive and well, with major indexes hitting new highs in recent days. However, growth stocks in particular have been hit hard recently, and that requires some selling. As for new buying, today’s recommended stock is growing by consolidating a fragmented mature industry. It just came public this year, so it’s a name few investors are aware of. But prospects look good! The stock was originally recommended by Tyler Laundon in Cabot Early Opportunities and here are Tyler’s latest thoughts.

Driven Brands (DRVN)
Technically, Driven Brands (DRVN) launched in 2008 when Meineke and Maaco officially joined forces. But the genesis for the company really dates back to 1972 when Meineke Discount Muffler and Maaco Stores first opened.

It took nearly a half-century, but Driven Brands has evolved into the largest automotive services company in North America. Along the way it has acquired many brands, which today are represented in the six core brands of Maaco, Meineke, CARSTAR, 1-800-Radiator, Take 5 Oil Change and International Car Wash Group.

Acquisitions are part of the growth story and will continue for the foreseeable future. In fact, just last week Driven acquired 18 Frank’s Car Wash Express stores in South Carolina. Over just the last 12 months the company has acquired 67 car washes.

At a high level, the pitch for the company is that auto maintenance is a large market (nearly $60 billion) and represents a recurring expense, but the market is extremely fragmented. Despite being the biggest in North America and owning well-known brands, Driven only holds around 1% maintenance market share. That means tons of room to grow.

Driven Brands is increasingly diversified into markets that are adjacent to auto maintenance.

For instance, International Car Wash (IMO in Europe and Australia, Car Wash USA Express, GOO-GOO 3-Minute Express, and Supersonic in the U.S.) has roughly 940 locations around the world (200 in the U.S.) making it the largest car wash operator by location count. Customer demographics here are slightly different than in the maintenance market (higher earners, more male, newer cars) as there is less reliance on dealerships for car washings. This brand represents roughly 40% of revenue.

Maaco represents the company’s play on paint and light collision work. Services performed are typically below insurance claim levels, whereas CARSTAR (and ABRA and Fix Auto) offer full collision repair and refinishing services, with nearly 90% of revenue generated through agreements with insurance companies.

Rounding out the mix are the “platform services,” mainly represented by the 1-800-Radiator brand. These services add some revenue, but the strategic rationale is really to drive sales to the aforementioned brands.

In a way Driven Brands is the automotive market’s equivalent of the quick serve restaurant space’s Dunkin’ Brands (DNKN) or Restaurant Brands (QSR). Around 83% of stores are either franchised or independently owned, which earns Driven the “asset light” moniker that research analysts use as code for companies that, in part, succeed by using other people’s money.

Stepping back, the company should continue to do well as economies reopen and the store count expands from just over 4,000 today to roughly 5,000 by 2024. Management has talked about a seemingly conservative same-store-sales growth outlook of 2%, which seems low given that it averaged 4% for the decade ending in 2019. That said, growth in some segments, like collision, could be lumpy as it will take some time for more congested areas to churn out the fender benders and crashes that feed those brands.

The company, which just went public in January, should grow revenue by around 44% to $1.3 billion in 2021 (acquisitions help) then by another 10%, to $1.43 billion, in 2022. Adjusted EPS should be up around 164% to $0.66 this year, then up 15% to $0.76 next year.

This is what the chart looks like.

DRVN came public at 22 on January 15 and popped 21% the first day. Shares rallied to an all-time high of 35.6 by February 12, then sank with other growth names into March. Earnings on March 10 were poorly received, and DRVN fell back to its IPO price by the end of March.

The stock soon jumped back to 25, then the Q1 report on April 28 ignited a rally that carried DRVN back near 30. Shares have been a little up and down since, but overall, the trend is up and DRVN should do well as we get into the busy summer driving season. BUY

Current Recommendations

The first job today is to sell our weakest stocks, those that have broken down in recent days and could easily go lower. The four that I’ve identified all have modest losses and taking losses at this level is far more palatable than taking them at larger levels. To this point, the market’s selling pressure has been focused on growth stocks, so at least for now, I’m going to favor stocks with less downside potential, like today’s recommended stock.

Changes
Maravai Lifesciences (MRVI) to Sell
Palantir (PLTR) to Sell
Progyny (PGNY) to Hold
Roblox (RBLX) to Sell
Schlumberger (SLB) to Sell

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 hit a new high just last Wednesday! 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 latest update, Tom wrote, “Since being added to the portfolio, I’ve believed that it is only a matter of time until this technology behemoth takes off. And that time may be fast approaching. AVGO has been held back by consolidation in the tech sector. But that sector appears to be breaking out of its funk. AVGO has already moved to the highest level since April and within just 3% of the all-time high.” BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, hit a new high on the first day of July and has pulled back normally since. In his update last week, Tom wrote, “This solid and defensive infrastructure partnership has performed on par with the S&P 500 over the past five-, two- and one-year periods, but with less volatility. That’s not bad in a bull market. This stock has outperformed the market in prior periods. The emphasis on infrastructure by the new administration and the growing popularity of the infrastructure subsector could return BIP to the days of outperformance going forward.” 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. In his latest update, Mike wrote, “FIVE is a good example of what’s been going on in the broad market, even among decent stocks—shares popped on earnings in early June for one day, before backing off for the next two weeks. Then came a four-day surge toward its highs … followed by the latest three-week retreat into the middle of its range. It’s tedious as can be, though that said, given that the stock hasn’t done anything wrong, there’s nothing to do but grit our teeth and continue to practice patience. At this point, a drop below 175 or so would call into question the major uptrend (below the 40-week line and the prior low), and thus would likely have us taking the rest of our profit off the table. But at heart we still believe all these weeks of wobbles will resolve to the upside given the firm’s story, outlook and lack of big-volume selling in recent weeks. If you own FIVE, hang on.” HOLD

Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, and featured here last week, is a little lower now, but the selling power is mild so far. In his latest update, Mike wrote, “FND has hit some resistance of late that’s caused it to back off a bit, but we actually see a lot of encouraging signs here—the fact that shares have only dipped grudgingly and on light volume despite the recent run (and weakness in the broad market) plays into the thought that the stock’s correction is over. There’s been nothing new from the company, though fears over the new Delta strain of the virus have been used as an excuse to hit many retail stocks (including FIVE above), but if anything, Floor & Décor’s business should be resilient as housing and construction is likely to boom even if there’s another smaller virus wave ahead. We’ll stay on Buy.” BUY

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has been a great winner for us this year, but Bruce thinks there’s more in the tank! In his update last week, he wrote, “The shares perked up after brokerage firm Wedbush initiated coverage of GM with an ‘outperform’ rating and an $85 price target. We’ve thankful for the support, but GM’s shares near-term will likely be driven by the company’s 2nd quarter earnings results, guidance for the third quarter and full-year, and its commentary on EVs and other initiatives. While the earnings outlook continues to show sizeable improvements, GM shares have gone nowhere since early April and it would seem that expectations are high going into the August 4 report. GM shares have 18% upside to our recently raised 69 price target.” HOLD

HubSpot (HUBS), originally recommended by Tyler Laundon in Cabot Early Opportunities and then by Mike Cintolo in Cabot Top Ten Trader, is only eight trading days off its latest high. In my update last week, I recommended “deferring buying until the stock pulls back a little more” and if you’ve been doing that, the 50-day moving average around 530 might be an attractive level. BUY

Maravai (MRVI), originally recommended by Tyler Laundon in Cabot Early Opportunities, was bought on a pullback, but it’s pulled back even more, and with no clear bottom in sight, I recommend selling now. SELL

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has been correcting for a month now, but Bruce says that higher prices are still ahead. In his update last week, he wrote, “Investors’ primary worry is that the company has little or no revenue growth as it produces relatively few of the fast-growing hard seltzers and other trendier beverages. 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. The company will likely re-instate its dividend later this year, which could provide a 2.7% yield. TAP shares have about 32% upside to our 69 price target.” 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 but it’s been trending slowly higher since then, and showed some real strength in recent days. In his lastest update, Tom wrote, “NextEra is still one of the best regulated utilities in the country with the added benefit of growth from being the world’s largest producer of wind and solar. The high-growth clean energy business (which also gets more profitable every year) will have its day in the spotlight again, and probably in the near future.” BUY

Nvidia (NVDA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a new high two weeks ago and has pulled back since. And last week the stock was in Cabot Top Ten Trader again, where Mike wrote, “It’s easy to get excited over Nvidia given its head-spinning growth rate and expansion into new, growth-y areas. When we last covered the company in June, Nvidia had just released blockbuster earnings and announced the release of new laptops with its RTX series GPUs (a major revenue driver). Beyond gaming, Nvidia’s data center business is also a major growth story—analysts predict the data center segment can generate up to $30 billion (!) in annual revenue by 2025. Then there’s self-driving vehicles, which Nvidia is positioning itself to be a leader in thanks to hundreds of auto industry partnerships. Plus, the firm’s graphic cards are heavily used to mine bitcoin and ethereum, giving it exposure to the cryptocurrency market. Beyond all of that, a key reason for the strength is the increasing confidence among analysts that regulators will approve Nvidia’s acquisition of Arm Holdings, a chip maker that that holds patents and licenses for a large range of semiconductor architecture designs. Management expects the deal to be approved early next year and sees it creating the premier computing company’ for the age of artificial intelligence by allowing Nvidia to deploy its GPU and AI technologies to a wider range of end markets, including mobile and the Internet of Things (IoT). Wall Street sees the top line increasing a mouth-watering 50% this year, with the bottom line rising 59%. Nvidia is one of the top liquid leaders in the market today.

“After an extended sideways range from last September through April—and two failed breakout attempts—the third time proved to be the charm for NVDA. The stock catapulted off its 200-day line on huge volume before and after its latest earnings report in May and went on from there to reach new highs above 800. Big picture, we’re bullish, but we think the recent hesitation could take the stock down further. Aim to buy on weakness.” BUY

Palantir Technologies (PLTR), originally recommended by Carl Delfeld in Cabot Explorer, has turned into a loss for us, and that’s not good. There’s potential for the stock to find support at 20, but right now, I don’t see any strength, and I prefer to cut the loss short. SELL

Pinduoduo (PDD), originally recommended by Carl Delfeld in Cabot Explorer, and featured here two weeks ago, as it had pulled back 47% from its high, is a little lower now, and I see the potential for a bottom at 100. In his update last week, Carl wrote, “Pinduoduo shares were up marginally this week after a sharp drop the previous week related to China stocks being under a bit of a regulatory cloud. I moved this stock to a hold last week pending some clarification on this issue and am anticipating a bounce-back in the coming week. Pinduoduo’s edge in China’s discount marketplace is a platform that allows shoppers to team up for group discounts and 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, has a story that I like a lot, but I don’t like the loss, so this is certainly a candidate for sale. On the other hand, Mike is sticking with it (for now). In his update last week, he wrote, “PGNY was one of the first stocks out of the gate after the market’s May low, but like many names, that strength hasn’t persisted, and this week shares dove below their 50-day line on average volume. As we’ve written many times, we doubt there’s anything wrong with the fundamental story here, which isn’t dependent on the economy or affected by the virus and should play out for a long time to come. Throw in the fact that stocks have been bouncing after pullbacks and we’re willing to give PGNY a bit more rope—but not too much.” HOLD

Roblox (RBLX), originally recommended by Mike Cintolo in Cabot Growth Investor, is a young and volatile stock, and going the wrong way. In his update last week, Mike wrote, “RBLX had been steadying itself for three weeks, even showing some tight weekly closes, and there was actually some good news this week (Roblox’s service launched in China in partnership with giant Tencent). But none of that has stopped from the sellers coming around for the stock again—shares decisively sliced their 50-day line this week, though volume was just so-so. Sure, there’s always the chance that the quarterly report (likely out in three weeks or so) turns this around, but we’ve given our half-sized stake enough of a chance to correct and hold up; we advised selling and holding the cash on yesterday’s special bulletin.” SELL

Schlumberger (SLB), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has fallen sharply in the last six weeks, down 28% since the June 3 top above 36 and with no signs of a bottom, with the sell-off accelerating on Monday. Time to sell. SELL

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, still has a great chart! In Carl’s latest update, he wrote, “Sea’s share price rally since January 2019 (up >20x vs. the MSCI EM ETF) or January 2020 (up 500% vs. the MSCI EM ETF) reflects the step-change in gaming revenues and re-rating of Shopee, in our view. We see further upside potential to Sea’s share price from: (1) strong momentum in its gaming portfolio; (2) the ramp-up of e-commerce revenues with wider adoption of online services and market share gains by Shopee; (3) major game launches; (4) scope for a material increase in the total addressable market with the launch of high-spec games catering to high-end gamers and efforts to stimulate revenues in India; and (5) publishing rights in new geographies (e.g., India).” 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. Reflecting its Tier One supplier roots, automakers provide about 60% of total revenues. Sensata also benefits from rising secular demand for improved fuel efficiency, safety, emissions and customer conveniences like lane-keeping and other advanced driver-assist systems. Once a threat, electric vehicles are now an opportunity, as the company’s expanded product offering (largely acquired) allows it to sell more content into an EV than it can into an internal combustion engine vehicle. Strong cyclically driven revenue and profit growth this year will taper to more sustainable rates next year. Risks include a possible automotive cycle slowdown, chip supply issues, geopolitical issues with China, currency and over-paying/weak integration related to its acquisitions. ST shares have about 30% upside to our 75 price target.” 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. Short-term, I don’t see any big upside or downside potential (though it’s always possible), but long-term, I continue to believe that the company has great growth prospects, particularly in the energy industry. 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 peaked in February, bottomed from late March to mid-April, and has been base-building since. Technically, there’s always the possibility that these bases will collapse, but I’m optimistic that once second-quarter reports come out (Trulieve’s will be released on August 12 before the market open), buyers will take charge. BUY

The next Cabot Stock of the Week issue will be published on July 26, 2021.

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