July 6, 2021

The bull market rolls on, and our portfolio continues to deliver, so I continue to recommend that you be heavily invested in stocks that help achieve your investing goals.

Today’s featured stock is a big Asian consumer company that’s still growing extremely fast; in fact, revenues are accelerating!

As for the current portfolio, to keep it at our maximum level of 20 stocks, we’re parting company with little marijuana company Columbia Care (CCHWF), mainly because it’s our biggest loser.

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 355

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. Today’s recommendation is a big fast-growing technology company that you may not have heard of, but that has had a huge impact on the lives of Asian consumers. It was originally recommended by Carl Delfeld in Cabot Explorer and here are Carl’s latest thoughts.

Pinduoduo (PDD)
Private Chinese growth and tech stocks are out of favor right now for two reasons. First, Beijing is cracking down on the sector fearing that they have become too independent. Some of them, such as Alibaba (BABA), have grown so fast and have become so large that they have tremendous market power that unsettles regulators.

Second, quite a few of them, while growing revenue and customers at a torrid pace, are still losing money and investors are losing patience.

But the big picture for online sales in Asia in intact and bullish. According to Market Insight Reports, the Asian e-commerce market is expected to enjoy a compound annual growth rate of 18% through 2025. The region is also the leader in online sales, accounting for 59% of the global online retail sales in 2020.

The result is that a number of e-commerce Chinese stocks are off their early 2021 highs by around 30%, presenting us with good relative value. Such is the case with Pinduoduo. The chart is currently not strong, but I see this as an attractive entry point for long-term investors.

Many of you will be familiar with the company’s name and their business model.

Pinduoduo is the third-largest e-commerce player in China in terms of annual revenue, but in terms of total shoppers, it’s actually now larger than JD, with 628 million annual active buyers. Like Alibaba, Pinduoduo generates most of its revenue through listing fees and ads for third-party merchants.

Launched in 2015, Pinduoduo first targeted users from rural areas to avoiding going head-to-head with giants like Alibaba (BABA). The company also focused on being a mobile-only, social media, e-commerce platform to fuel its high growth. In particular, its partnership with Tencent (TCEHY), which owns a 15.6% stake in Pinduoduo, enabled the company to leverage WeChat to build its user base out quickly and efficiently.

Now the company is building on this growth to expand into more affluent cities with branded and even premium products. It is also reaching out to farmers and helping them directly ship their produce to shoppers.

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 has also partnered with leading brands to challenge Alibaba and JD and enables online agriculture by helping over 12 million farmers to directly ship their produce to customers.

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. Analysts expect its revenue to grow 92% for 2021.

The company reports that it had 823 million active buyers on its platform as of March 2021, a 30% increase over the prior year. While not yet profitable, Pinduoduo is sitting on a mountain of cash of $84 billion, which translates to $67 per share.

Given Pinduoduo’s strong growth numbers, I suggest that investors comfortable with China risk begin with a half position. You can scale up as the stock develops an uptrend and over time bring in other e-commerce ideas to build a portfolio at the core of this unstoppable power trend.

Tim’s note: I like the combination of accelerating revenue growth (one of my favorite metrics) and the deep pullback (currently 47%).

Current Recommendations

The portfolio as a whole is acting well, with no obvious candidates for sale. But the addition of PDD means something has to go, and in the end the answer was simple; it’s our biggest loser, Columbia Care (CCHWF). Details below.

Changes
Columbia Care (CCHWF) 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 came very close to hitting a new high last week. 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, Tom wrote, “This crucial infrastructure technology company has too much going for it as technology proliferates and 5G rolls out not to get a move on at some point in the near future. It’s possible the technology sector is coming alive already. The Nasdaq finally eclipsed the February high this week and AVGO has moved more than 12% higher since the middle of May.” BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, gapped up to a new high last Thursday and has pulled back normally since. In his update last week, Tom wrote, “The infrastructure partnership just keeps trending higher, but at a pace that’s so slow you can barely notice. It has been trending ever-so-slowly higher for the whole year. That’s okay. It pays a solid dividend with a price that trends higher in an uncertain market. It also has rising earnings as recent acquisitions boost the bottom line. And infrastructure may become a much more popular subsector if Congress passes any kind of infrastructure bill.” BUY

Columbia Care (CCHWF), originally recommended in Cabot Marijuana Investor by yours truly, remains the portfolio’s biggest loser, but I still believe (optimistically) the bottom has been established. In fact, this morning the stock saw a big buy order (obviously placed over the holiday weekend) that gapped the stock up to 5.1! However, we don’t have an uptrend yet, and neither does the sector. In my Cabot Marijuana Investor issue last week, I wrote, “Columbia Care is a New York-based vertically integrated multistate operator, with 87 dispensaries and 27 cultivation and manufacturing facilities in 10 states (Arizona, California, Colorado, Florida, Illinois, Massachusetts, New Jersey, Ohio, Pennsylvania and Virginia). But it’s still substantially smaller than the big four, and thus growing faster. Chartwise, however, CCHWF is our weakest stock, and our April 15 buy now shows a growing loss—so the stock could be sold; cutting losses short is a very good policy for growth investors. But I’m going to stick with it, because I think the main reasons for the weakness are the sector and the low price of the stock, which means institutional sponsorship is very light.” That rationale makes sense for Cabot Marijuana Investor, because obviously, it’s restricted to marijuana stocks and it has a longer-term horizon to deal with them. Here in Cabot Stock of the Week, however, where we buy a stock every week and sell (on average) once a week, I have less time to sit patiently. Plus, as I’ve said many times, cutting losses short is a very good policy. So CCHWF gets the axe today. SELL

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 update last week, Mike wrote, “FIVE was tedious for a few months, but despite all the crosscurrents, the stock never got hit too badly (15% top-to-bottom correction) and is now looking peppier—after pushing back to resistance near 200, the stock has backed off a bit but remains within a few points of new high ground. With many of the names benefiting from the economic reopening, there’s some fear that 2022 won’t show much growth, but that shouldn’t be a problem here; analysts see sales and earnings up 18% next year, and those are almost always a bit shy of what reality turns out to be. In other words, Five Below’s 20%-plus annual growth plan (driven by the rapid expansion of its store base) should be in place even after this year’s huge earnings rebound (up 125% from a year ago and up 59% from 2019!). Stock-wise, we’re not necessarily waiting for a breakout, but it’s a fact that the recent upmove came on very quiet volume and there’s a bunch of resistance in this area. If you want to pick up a few shares, go ahead, but officially we’ll stay on Hold until we see a bit more decisiveness from FIVE.” 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 four weeks ago and has pulled back normally since. In his update last week, Bruce wrote, “GM is making immense progress with its years-long turnaround from a poorly managed post-bankruptcy car maker to a highly profitable gas and electric vehicle producer. GM shares have 17% upside to our recently raised 69 price target. On a P/E basis, the shares trade at 8.6x estimated calendar 2022 earnings of $6.87 (unchanged this past week). The 2021 estimate was also unchanged. HOLD

Huazhu Group Limited (HTHT), originally recommended in Cabot Explorer, remains a long-term hold, as growth prospects remain great for the largest operator of hotels in China. The stock has been trading in a consolidation zone between 50 and 60 for a few months, but will almost certainly break out to the upside in time. HOLD

HubSpot (HUBS), originally recommended by Tyler Laundon in Cabot Early Opportunities and then by Mike Cintolo in Cabot Top Ten Trader, broke out to another new high today! BUY

Maravai (MRVI), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here last week, has pulled back to touch its 50-day moving average and that makes this a fine entry point. BUY

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, “The thesis for this company is straight-forward – a reasonably stable company whose shares sell at an overly-discounted price. or any) 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. TAP shares have about 26% upside to our 69 price target. The shares trade at 14.1x estimated 2021 earnings of $3.90 (unchanged this past week).” 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 former superstar has been floundering for months. But I like the way alternative energy is set up going forward. Amidst the pandemic and boom in technology followed by the cyclical rally, investors forgot about this fast-growing subsector. But, as things normalize after the pandemic, clean energy will be a hot trade again, and this conservative play will be right there.” BUY

Nvidia (NVDA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is a reminder that great growth stocks sometimes need to rest. After climbing from 12 to nearly 600 over ten years, the stock paused last September to catch its breath—and for eight months it made no progress. But in late May buyers took control, and since then the stock is up 52%, and hitting another new high today! Momentum investors can still buy here. BUY

Palantir Technologies (PLTR), originally recommended by Carl Delfeld in Cabot Explorer, has pulled back moderately over the past week but remains above its 50-day moving average. In his latest update, Carl wrote, “Palantir shares didn’t do much this week for this software company specializing in big data analytics. 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. In recent months Palantir signed various government contracts, such as:

• $111 million from U.S. Special Operations Command
• $7.4 million from the CDC
• $90 million from the National Nuclear Safety Administration
• $18.4 million from the FAA
• $32.5 million from the U.S. Space Force Command

The company sees plenty of room to expand into the commercial sector. There is plenty of room to grow as the private sector currently represents just 44% of its business. I encourage you to buy shares if you have not already done so.” BUY

Progyny (PGNY), originally recommended by Mike Cintolo in Cabot Growth Investor, remains on a normal correction and can be bought here. In his latest update, Mike wrote, “PGNY remains in a correction of sorts, pulling back about seven points but holding its 50-day line (now just above 58). In the current environment, usually it’s these types of names (that have dipped to support over two or three weeks) that find buyers, so we’re optimistic that will be the case here. Bigger picture, we certainly want to give our half-sized position a chance: In a May presentation, the company stated that it believes it has penetrated less than 4% of its target market and notes that two-thirds of their clients left their health carrier to work with Progyny, and given that the firm’s solution works so much better than standard fertility plans (leading to drastically lower treatment, drug and maternity care costs for employers, not to mention higher productivity), there’s no reason the user base can’t expand many-fold in the years ahead. A break of the 50-day line could have us moving to Hold, with a dip into the lower/mid-50s a red flag. But right here, the pullback looks normal so we’re fine grabbing shares.” 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 has bounced nicely in recent days, lifting off its 50-day line (now near 82.5), which is obviously good to see. It’s a close call, but we’re going to stay on Hold for a bit longer to see if this bounce sticks—we’re not doubting it, per se, but the fact that the stock gave up its entire breakout before rebounding isn’t the best sign, and the rally has ‘only’ recouped about half of the decline. Any hint that May’s business slowdown was a one-off would likely do wonders, but we’ll have to see if/when the firm will release the next update. All in all, we’re happy to give it some wiggle room, but we’re keeping our Hold rating in place.” HOLD

Schlumberger (SLB), originally recommended by Mike Cintolo in Cabot Top Ten Trader, dipped 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, has pulled back normally since hitting a record high two weeks ago. In Carl’s latest update, he wrote, “Sea shares over the last month have gone from 255 to 275 and over the last six months have moved from 196 to 275. 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.” BUY

Sensata Technologies (ST), originally recommended by Bruce Kaser for the Buy Low Opportunities of Cabot Undervalued Stocks Advisor, and featured here three weeks ago, 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. Its innovations have helped increase its content per vehicle such that its automotive revenues are outgrowing the industry – in the most recent quarter by 9.1 percentage points. This is a truly global company. Nearly two-thirds of its revenues are generated outside of the United States, with China producing about 21%. ST shares have about 30% upside to our 75 price target. The stock trades at 14.2x estimated 2022 earnings of $4.04 (unchanged this past week). On an EV/EBITDA basis, ST trades at 10.9x estimated 2022 EBITDA.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is a stock I’ve had rated hold for a long time, thinking it was simply too popular. But two weeks ago I upgraded it to buy, thinking that both the stock and investors’ opinions had cooled off enough, and since then the stock has gapped up away from its base at 600 in what may be the beginning of a renewed advance. If you don’t own it, you can buy some here. 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 as a whole 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, preparing to resume its advance. If you don’t own it, you can buy here. BUY

The next Cabot Stock of the Week issue will be published on July 12, 2021.

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