June 14, 2021

The bull market rolls on (though never in a straight line, of course) and Cabot analysts continue to discover great new investments.

Today’s featured stock is an established company that manufactures a very wide variety of sensors for industry, with the automotive industry being number one. Growth prospects are good, and the stock is a bargain.

As for the current portfolio, Broadcom (AVGO) is upgraded to buy, and we’re taking profits in Barrick Gold (GOLD).

Cabot Stock of the Week 352

The bull market that began in March 2020 rolls on, and I continue to recommend that you hold a diversified portfolio of stocks chosen through a variety of proven investing systems. Today’s recommendation is a key player in the automotive industry (which has been constrained by component shortages) and should boom as global growth accelerates. The stock was originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and here are Bruce’s latest thoughts.

Sensata Technologies (ST)
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. These products are typically critical components within cars, trucks, factories and jets, yet since they represent a tiny percentage of the end-products’ total cost, they generally yield high profit margins. Also, as their reliability is vital to safely and performance, customers are reluctant to switch to another supplier that may have lower prices but also lower or unproven quality. Sensata’s franchise provides it with a durable source of core revenues and profits.

Sensata is a truly global company. Nearly two-thirds of its revenues are generated outside of the United States, with China producing about 21%.

The company was founded in 1916, owned by Texas Instruments for decades, and returned to public ownership in 2010. Sensata’s foundation has long been as a Tier One supplier to automakers, which still provide about 60% of total revenues. 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. 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. As the light vehicle market is thriving, Sensata’s core business should ride along at a healthy clip. Its heavy vehicle/offroad segment (about 17% of sales) is also seeing strong growth, helped by the early stages of a cyclical rebound.

Since gaining its independence, Sensata has pursued new opportunities in adjacent markets. Called “megatrends” by the company, these new markets (which include electric vehicles, autonomy and smart connected) offer considerable growth potential. Its Xirgo deal opens a new market in telematics and data insight for freight truck and cargo/container fleets. The Gigavac and Lithium Battery acquisitions build upon Sensata’s growing presence in the electric vehicle battery industry. Once a threat, electric vehicles are now an opportunity, as the company’s expanded product offering allows it to sell more content into an EV than it can into an internal combustion engine vehicle.

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. Healthy free cash flow provides the company with considerable financial flexibility. Sensata’s relatively new CEO, Jeff Cote, who was promoted in March 2020, will likely devote some of its financial resources to additional acquisitions to continue to expand the company’s growth potential.

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 are undervalued at current 11.2x estimated 2022 EV/EBITDA and 14.6x estimated 2022 earnings of $4.06. We have a 75 target price on ST shares, about 26% above the current price.

Current Recommendations

The addition of ST to the portfolio means we now have 21 stocks—and that’s too many. Something’s got to go. And it’s a tough choice. But in the end my choice is Barrick Gold (GOLD), which has brought us a nice little profit rather quickly. Details below.

Changes
Barrick Gold (GOLD) to SELL
Broadcom (AVGO) to BUY

ASML Holding (ASML), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, 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. We’re off to a good start. BUY

Barrick Gold (GOLD), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has pulled back to its 50-day moving average over the past month, but the uptrend that began in February remains intact. In his update last week, Bruce wrote, “Barrick shares have about 16% upside to our 27 price target. The price target is based on 7.5x estimated 2021 EBITDA and a modest premium to its $25/share net asset value.” So, holding would be easy. But I’m going to sell here, because we’ve got a decent three-month profit and in the long run, I don’t see real growth potential for Barrick, especially given that gold’s role as a safe alternative may be usurped by cryptocurrencies. SELL

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, where he focused on the technology market and highlighted AVGO as one of the big winners, Tom wrote, “Technology begets more technology. Technological advancement enables still-faster advancements going forward. It’s like a snowball rolling downhill. It’s a monster that is taking over everything. Here are just a few facts that illustrate the phenomenon.

• 90% of the total world’s data was generated in the past two years.
• Computing capacity doubles every 18 months.
• Every second 127 new devices connect to the internet.
• 66 billion people, or 59% of the world’s population, connect to the internet.
• There will be an estimated 75 billion internet of things (IoT) devices connected by 2025, a threefold increase from 2019. Spending on IoT is expected to exceed $1 trillion by 2023.

Sure, the cyclical sectors are coming back. There will also be solid growth in other industries. But nothing will compare to the immense growth in technology. The sector will rule the market for many years to come.

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.

The company essentially provides crucial equipment that enables technology to function as we know it today. It provides components that enable networks to operate together and communicate with each other from the service provider all the way to the end user and device.

All that may sound complicated. But 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.

It’s worth noting something about this company. It can often be tough to pick the right horse as new technologies roll out, but Broadcom is well established at a crucial point that makes these technologies work, no matter who wins. To illustrate the advantage, about 90% of all internet traffic passes through Broadcom’s systems. That’s why the stock has returned over 1,600% over the last 10 years.

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.

Longer term, Broadcom will see greater demand as its chips will be an enabling technology behind powerful emerging trends like the internet of things, self-driving cars and artificial intelligence.

Then there’s the dividend

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.

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.”

Tom has the stock rated Buy and I’m going to upgrade it to buy now, given the four-month consolidation phase that should soon lead to a breakout. BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, hit another new high last Tuesday and has pulled back normally since. In his update last week, 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

Coca-Cola (KO), originally recommended by Bruce Kaser for the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, broke out to a new high three weeks ago, and remains above all its moving averages. In his latest update, Bruce wrote, “KO shares have about 15% upside to our 64 price target. While the valuation is not statistically cheap, at 25.5x estimated 2021 earnings of $2.18 (unchanged in the past week) and 23.6x estimated 2022 earnings of $2.36 (unchanged), the shares remain undervalued given the company’s future earning power and valuable franchise. Also, the value of Coke’s partial ownership of a number of publicly traded companies (including Monster Beverage) is somewhat hidden on the balance sheet, yet is worth about $23 billion, or 9% of Coke’s market value. This $5/share value provides additional cushion supporting our 64 price target. KO shares offer an attractive 3.0% dividend yield.” BUY

Columbia Care (CCHWF), originally recommended in Cabot Marijuana Investor by yours truly, has failed to hold up in the 6 area and is now heading for its previous low at 5.25, while its 200-day moving average promised support in the 5.35 region. But we can live with that, as it mirrors the action of many of the stocks in this sector which is still setting up for its next big advance. Meanwhile, the company continues to grow its business. Last week, management announced the closing of its acquisition of Green Leaf Medical, which brings approximately 400,000 sq. ft. of cultivation and production capacity as well as four operational dispensaries and six in-development dispensaries. Located in Pennsylvania, Maryland, Virginia and Ohio, these assets will “secure our position as a national leader and the most scaled operator in the Mid-Atlantic,” said Nicholas Vita, CEO of Columbia Care. 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 update for Cabot Growth Investor last Thursday, Mike wrote, “Five Below’s growth story remains firmly on track, as was revealed in the Q2 report. The headline sales (up 198%) and earnings (84 cents vs. a loss of 93 cents per share a year ago) were inflated due to easy pandemic comparisons plus a lower tax rate. But both crushed expectations and there’s no question business is surprising on the upside—revenues easily surpassed expectations, as did operating margins, while same-store sales for the subset of stores that remained open in the year-ago quarter boomed a whopping 23%. Management also meaningfully raised the current quarter’s revenue outlook (now up 50% from a year ago) as the store expansion plan (67 new openings last quarter) plows forward. Analysts hiked this year’s earnings figure ($4.73 per share now vs $4.22 prior to the report) and, importantly, also hiked 2022’s figure ($5.51, up from $5.12). Now, despite the good news, FIVE hasn’t taken off—it did have a good reaction but has backed and filled since. We’re optimistic a low might be in, so we’re happy to hold on, but we still want to see more strength before concluding a new uptrend is underway.” HOLD

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has pulled back moderately from the new highs hit last week but is likely to find support here. In his update last week, Bruce wrote, “GM provided some encouraging commentary on the semiconductor shortage, which strongly implied some upside to second-quarter results. A quieter announcement but one with potentially much higher long-term value is that GM will offer its OnStar Guardian security services to anyone in the U.S. and Canada, not just owners of GM vehicles. OnStar currently has somewhere around 1 million paid subscribers and has the potential to become an industry standard. This could provide a highly valuable and large annuity-like profit stream for GM in coming years. We are raising our price target on General Motors (GM) from 62 to 69. The company’s fundamentals remain robust, even as its core earning power (gas-powered trucks and cars) is suppressed due to the chip shortage. EV competition from start-ups is fading, although Ford is showing renewed vigor. We are keeping the Hold rating as the new target represents only a 10% increase from the current price.“

However, that breakout to a new high means the stock is now attractive to momentum investors, including Cabot Top Ten Trader’s Mike Cintolo, who last week wrote, “GM actually got going in October, before most cyclical stocks, running from 34 then to around 60 by March. The consolidation since then has been solid and relatively tight, with selling volume on the weekly chart easing nicely. And now the bulls are flexing their muscles again, with huge-volume buying on May 27 and June 3 as GM tests its prior highs.” Traders, therefore, could buy on this dip, but I’ll stick with hold, planning to sell when Bruce gives the signal. 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, was bought on a normal correction (from 575 down to 500) and it’s now trying to climb back to that old high. BUY

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, hit a new high last Thursday and has pulled back normally since. In his update last week, Bruce wrote, “We are raising our price target on TAP from 59 to 69: The company continues to make progress with its new product development and its efficiency initiatives and is likely to see additional volume growth as its geographic markets fully open following the pandemic. TAP shares still do not adequately reflect the company’s value and earning potential. TAP shares have about 13% upside to our new 69 price target. The shares trade at 15.7x estimated 2021 earnings of $3.89 (up two cents this past week). Estimates for 2022 were up three cents to $4.23.” 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 the pattern of higher lows that it’s established since is encouraging. In his latest 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, has had an amazing run over the past ten years, zooming from 12 to over 700, and it’s not done yet! The company’s graphics processing chips are in high demand from video game makers, data center managers and automobile manufacturers, and the stock reflects this demand, hitting another new high just last week. BUY

Palantir Technologies (PLTR), originally recommended by Carl Delfeld in Cabot Explorer, has been trending higher since releasing an excellent first-quarter report on May 11. In his update last week, Carl wrote, “Revenue growth for the company remains strong, and its bread-and-butter governmental business continues to rack up contract wins such as last week’s deal signing worth $111 million with the United States Special Operations Command (USSOCOM). Palantir is a software company specializing in big data analytics. Peter Thiel and a few others from the PayPal mafia founded Palantir in the early 2000s. Its software is used by government agencies in a wide range of applications and the company sees plenty of room to expand into the commercial sector. On May 11, the company posted its first quarterly profit as revenue reached $341.2 million. PLTR stock is roughly 35% off its January peak and the stock has been in a clear uptrend.” BUY

Realty Income (O), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, looks absolutely fine, and pays a 4% dividend. In his update last week, Tom wrote, “This is another former recovery dog that has come alive lately. O went sideways for nine months, but has moved nearly 20% higher since the beginning of March. It’s still below the pre-pandemic high while profits have increased since then. It has retail properties that were highly unpopular during the pandemic but should bounce back strongly in the full recovery. The overall market may be high priced, but it’s still a very good time to pick up this legendary income stock.” BUY

Roblox (RBLX), originally recommended by Mike Cintolo in Cabot Growth Investor, is a mover! It broke out to record highs after we bought it, but now it’s on a normal—and sharp!—correction. In his update last week, Mike wrote, “RBLX is a perfect example of what we’re seeing in the market right now—the stock had a powerful breakout and rallied strongly, but quickly gave back half that move and has been under pressure the past few days. That said, it hasn’t done anything wrong, and we continue to see datapoints suggesting the big picture story here is playing out. One of them: Roblox and Warner Brothers are launching a virtual world surrounding the release of In The Heights (based on a musical by the creator of Hamilton), allowing fans to watch behind-the-scenes videos, contribute to murals, collect virtual items in mini-games and experience Latin American art and dance culture. Back to the stock, a drop back to 80 or so would probably tell us this breakout attempt has failed, but at this point, we’re still favoring the current dip being a normal shakeout. Hold on if you own some, and if you don’t, you can start a half-sized position here.” BUY

Schlumberger (SLB), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is now pulling back from its recent highs, but it looks fine, as volume is light. Mike has recommended several oil industry stocks in Cabot Top Ten Trader recently, and SLB is one of the strongest. BUY

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, looks great, and may just close at a record high today! In Carl’s latest update, he wrote, “shares were up 10 points this past week as Shopee, its thriving e-commerce arm, announced it will launch in Colombia and Chile, where it plans to offer online sales via its website and local apps. Shopee grew even faster than the gaming group Garena in the last quarter. Revenue rose 250% to $922 million on the back of a 153% rise in orders. Sea Money, Sea’s fintech division, saw adoption accelerate throughout the quarter. Mobile wallet payments volume more than tripled year over year to $3.4 billion, while quarterly paying users grew 145% to 26 million. 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.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains a long-term hold for investors with big profits, because there’s still plenty of growth opportunity in both the automotive and the energy business. Short term, however, the stock has no momentum today. Interestingly, last week Tesla began deliveries of the high-performance version of its Model S sedan, which can accelerate to 60 mph in less than two seconds, making it the fastest-accelerating production car ever (excluding those that cost over $2 million). But the stock didn’t care. It’s the mass market for electric vehicles that counts, and right now, lots of competitors (like GM) are rushing to serve that market. HOLD

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. But now it’s working hard to expand that footprint, and last week completed the acquisition of Solevo Wellness and its three West Virginia dispensary permits. Trulieve now has nine dispensary permits in the state as well as cultivation and production assets. The stock bottomed in mid-April at 35 and has set two higher lows since then, which is a good pattern, so if you don’t own it, you could buy a little here. (TCNNF looks marginally stronger than CCHWF.) However, the sector has not actually regained its strength, so until it does, I’m leaving this rated Hold. HOLD

The next Cabot Stock of the Week issue will be published on June 21, 2021.

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