July 26, 2021

What a difference a week makes! Since our last issue, stocks have recovered from their worst trading day since March to reach new all-time highs. So, the bull market remains very much intact, though some growth stocks continue to wobble. Fortunately, today’s featured stock combines both elements of growth and value – and unlike many traditional growth stocks right now, it’s hitting two-year highs.

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 358

What a difference a week makes! When I wrote to you last Monday, stocks were having their worst day since March, and looked primed for a more sustained pullback. Since then, they’ve gone nowhere but up – the S&P 500 is at fresh all-time highs as of this writing. So, the bull market remains very much intact. Still, growth stocks as a group continue to wobble a bit, and we do have one more sell today. But we will offset that portfolio subtraction with the addition of an undervalued big-tech company that is successfully shifting from being an aging equipment provider to the high-growth cloud software arena. The stock was originally recommended by Bruce Kaser in the Growth/Income Portfolio of his Cabot Undervalued Stocks Advisor. Here are Bruce’s latest thoughts.

Cisco Systems (CSCO)
Cisco Systems (CSCO) is a technology giant, selling $50 billion in technology equipment (about 72% of revenues) and related software and services. Its Infrastructure Platforms segment produces routers, switches and other gear that connect and manage corporate, government, telecom and other data and communications networks. The Applications segment offers a range of software and related services with a growing emphasis on cloud migration. The Security segment provides a full suite of network, email and cloud software and services to control access and minimize external threats. Cisco leverages its one-stop-shop breadth of products, software and services to provide customized packages that match each customer’s needs.

Founded in 1984, Cisco emerged as a dominant provider of internet gear, becoming one of the Silicon Valley tech darlings during the late 1990s dot-com bubble. However, due to its then-extreme overvaluation, as well as stagnant revenue growth (essentially zero growth in the past eight years), Cisco’s share price is now only about two-thirds its March 2000 peak. The company faces a secular headwind, as its core business has struggled against the rising adoption of cloud computing, which reduces the need for Cisco’s gear and its one-stop-shop capabilities.

However, Cisco’s prospects are starting to improve, with changes that started at the top. In 2015, the company promoted veteran Chuck Robbins into the CEO role, starting a slow but steady process to reinvigorate its operations. A new CFO, Scott Herren, who previously helped Autodesk rebuild in ways similar to what Cisco is doing, started this past December.

Cisco is accelerating its efforts to remain relevant and increase its value. To provide more recurring revenues and reduce its dependence on one-time equipment sales, Cisco is shifting its business mix to a software and subscription model. Progress is encouraging, with total third-quarter comparable revenues growing 4%. Software sales grew 13% and now comprise 28% of total revenues. Nearly 81% of software is now sold on a subscription basis, compared to 74% only a year ago.

A critical source of stability is Cisco’s strong reputation and its entrenched position within its customers’ infrastructure. As long as it can stay close enough to competitors’ offerings, the company should retain these valuable intangible assets.

The company has ramped up its cloud-based offerings after lagging in this critical category. Also, its impressive Webex video conferencing (like Zoom, only more secure, robust and innovative) is used by 85% of Fortune 500 companies. Across the board, the cadence of new products and services appears to be accelerating under Robbins’ leadership.

Cisco is highly profitable, providing a firm financial foundation. Its adjusted gross margin is wide, at about 65%, and its net profit margin at nearly 28% is impressive. The company produced $15.4 billion in cash flow from operations last year (fiscal year ended in July) and will likely repeat that rate in the current year. Its balance sheet carries $23 billion in cash, double the $11.5 billion in total debt. These financial strengths have allowed Cisco to reduce its share count by 17% over the past five years while paying a sustainable and rising dividend. The stock currently has an attractive 2.7% dividend yield.

Cisco shares have recovered sharply from their pandemic lows and are now approaching highs last reached in mid-2019. Yet, the valuation remains reasonable, trading at about 16.2x estimated EBITDA and 11.6x earnings based on estimates for fiscal 2022 results. With continued revenue growth and solid cash flow production, we see Cisco shares having a prosperous future. BUY

Current Recommendations

After selling out of four stocks last week, we have one additional sell today – Pinduoduo (PDD) – after the Chinese tech stock has broken down completely in the last few trading days, due mostly to overbearing regulatory restrictions by the Chinese government. So, our portfolio stays at 17 stocks for now. Thankfully, most of our remaining stocks are acting quite well. Details below.

Changes
Pinduoduo (PDD) 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 fulfill the world’s demand for chips. And the stock just keeps hitting new highs! In the last week alone, it’s gapped up from 684 to 750, a 9.6% jump in just four trading days. 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, “I know. This incredible technology titan, whose systems 90% of internet traffic use, hasn’t done much since being added to the portfolio. But the market has the kind of short-sightedness that can’t be corrected with glasses. Screen out the short-term noise and realize that we are in a technological revolution that’s getting a big shot of adrenalin as 5G rolls out. Just hang on to this one and enjoy the bounty over time.” 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, though it seems to be rebounding. In his update last week, Tom wrote, “BIP is resuming its painfully slow crawl back to new all-time highs. I don’t care what the stupid virus does or who’s president. Infrastructure isn’t going out of style. In fact, it’s getting more in vogue with investors as Congress bumbles around but still realizes the importance. Earnings should also get a big fat boost this year as new projects come online. BIP is a keeper that will bore you to tears while making you rich.” BUY

Driven Brands (DRVN), originally recommended by Tyler Laundon in Cabot Early Opportunities, was mostly flat in its first week in the portfolio after we added it last week. It’s the largest automotive services company in North Carolina, having acquired big-name brands such as Maaco, Meineke and CARSTAR. Auto maintenance is its specialty, and that’s a large ($60 billion) but fragmented market, with plenty of opportunity for growth; Driven Brands expects revenue to expand 44% this year, and adjusted EPS to swell by 164%. The stock came public in January and has been on a nice steady uptrend since April. We like it. 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, “The action is certainly encouraging, and the stock is just 7% or so off all-time highs—effectively, shares have corrected via time (sideways since March for the most part) rather than price (i.e., a 25% or 30% correction). Any decisive buying or selling power could push the stock out of its range, but until then, we’ll keep our Hold rating intact.” HOLD

Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, and featured here two weeks ago, took off this past week, zooming from 104 to 119, shattering overhead resistance in the 114 range in the process. In his latest update, Mike wrote, “The writing was on the wall with FND for the prior couple of weeks, as the stock’s tedious correction looked to be coming to an end. And now, partially due to plunging long-term interest rates (always a plus for construction and housing), the stock has come alive, bursting above some resistance on two days of big volume this week. Admittedly, FND is set to report earnings in a couple of weeks (August 5), but we really like the action here, which is essentially a seven-month consolidation resulting in the recent strength. If you already have a good-sized position (whatever that means to you), or don’t want to average up ahead of earnings, it’s fine to just sit tight. But we’re going to fill out our position, buying another 5% stake today. We’ll be using a loss limit on the entire position in the upper 90s in case shares turn tail.” 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, “General Motors is making immense progress with its years-long turnaround. It is perhaps 85% of the way through its gas-powered vehicle turnaround and is well-positioned but in the early stages of its electric vehicle (EV) development. GM Financial will likely continue to be a sizeable profit generator. GM is fully charged for both today’s environment and the EV world of the future, although much of its value is based on the unknown EV future. … GM shares fell 5% this past week and have 24% upside to our 69 price target. The shares have stalled and are essentially flat with their mid-January price. Near term, the market appears to be reluctant to upgrade its view of GM shares until there is more color on its 2021 and 2022 earning power.” HOLD

HubSpot (HUBS), originally recommended by Tyler Laundon in Cabot Early Opportunities and then by Mike Cintolo in Cabot Top Ten Trader, is inching back toward its early-July high of 609. I’ve been recommending deferring buying until the stock consolidates a bit, perhaps down to its 50-day moving average. Right now, that’s not happening – HUBS is up nearly 30 points since our last update! You can still buy here but waiting for dips would be better. BUY

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has been correcting for about six weeks now, but Bruce says that higher prices are still ahead. In his update last week, he wrote, “The company reinstated its quarterly dividend, set at 34 cents/share. The reinstatement was well telegraphed and was nearly spot on with our 35-cent estimate. The company also reaffirmed its full-year 2021 outlook. This is mixed news as we had hoped for more, but the company is likely being conservative, particularly with the emergence of the Covid Delta variant.

“TAP shares fell 1% in the past week and have about 35% upside to our 69 price target. Unlike KO shares, TAP shares have traded down on rising worries about the Covid Delta variant.

“The shares trade at 13.2x estimated 2021 earnings of $3.89 (unchanged this past week). Estimates for 2022 were unchanged.

“On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 8.9x current-year estimates, still among the lowest valuations in the consumer staples group and below other brewing companies.” 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 has showed some real strength this month, though it’s stagnated a bit in the last few trading sessions. In his latest update, Tom wrote, “NEE is still one of the best regulated utilities in the country with the added benefit of growth from being the world’s largest producers 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 in early July, retreated for about two weeks, but is now back on the upswing. Mike anticipated the rebound beautifully: the stock was in Cabot Top Ten Trader again two weeks ago, 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 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.” BUY

Pinduoduo (PDD), originally recommended by Carl Delfeld in Cabot Explorer, and featured here earlier this month, as it had pulled back 47% from its high, has unfortunately continued to fall at an alarmingly fast pace, cratering more than 8% on Monday and dipping well below our anticipated bottom around 100. The stock was falling so fast, in fact, that Carl advised his Explorer readers to sell early Monday. Here’s what he wrote: “Due to escalating regulatory risk by Chinese authorities, please sell Pinduoduo stock. … (I)n short, the Chinese are exerting their authority on Chinese companies that have used offshore entities to list on U.S. markets. China wants these companies to list in Hong Kong or Shanghai. There may be some trading and arbitrage opportunities developing, but the risk for Pinduoduo is now too high.” We will sell PDD as well, thus opening up another spot in the portfolio for a better opportunity down the road. SELL

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, “Progyny (is one of) our … weakest stocks, and thus remain(s) on a relatively tight leash; a dip back to 53 or so would probably have us cutting bait. But to PGNY’s credit, it doesn’t look that bad and, like most names, has rebounded nicely so far this week. We’re OK giving the stock a chance here—the story is pristine and the recent 20%-ish correction may have been enough to clear the weak hands out. Hold for now.” We will hold as well, though by our fingernails – the stock was back down to 54 on Monday, barely above Mike’s possible sell level. Keeping a very close eye on this one. HOLD

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, “I 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; (3) opportunity of growth through Sea Money fintech operations and geographically in India. I would be an incremental buyer of this stock, but long-time holders should take partial profits from time to time.” 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 for months was building a base in the 60 range before pulling back sharply in the last two weeks, down to 55 as of this writing, ahead of earnings on Tuesday. The fall hasn’t deterred Bruce. In his update last week, Bruce wrote, “There was no significant company-specific news in the past week. Taiwan Semiconductor reported record results but fell short of expectations, and the chairman made blunt comments about a possible China invasion, saying nobody wants a war in Taiwan as it would disrupt the global chip supply chain. For Sensata, China remains a murky risk, as we have no clear measure of the chances that Sensata’s sensors could be replaced by local manufacturing.

“Sensata reports earnings on July 27, with the consensus estimate for $0.88/share in earnings and $971 million in revenues.

“ST shares fell about 4% this past week and have about 37% upside to our 75 price target.

“The stock trades at 13.4x estimated 2022 earnings of $4.06 (unchanged this past week). On an EV/EBITDA basis, ST trades at 10.3x estimated 2022 EBITDA.” We’ll stay on buy too. 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 was base building for a couple months before pulling back again the last two weeks. TCNNF, specifically, has had rough couple weeks, tumbling from 39 to 32 since July 9. Still, I’m optimistic that once the second-quarter report comes out on August 12, along with other cannabis companies, buyers will take charge again. BUY

The next Cabot Stock of the Week issue will be published on August 2, 2021.

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