June 7, 2021

The bull market is looking healthier this week, as growth stocks have strengthened after a few months wandering in the wilderness, so I’m happy today to recommend a leader in the hot semiconductor machinery industry.

This addition brings our portfolio to fully invested status, and the good news today is that there’s nothing that needs selling; all our stocks are working!

That, of course, will change, but for now you should enjoy it!

Details inside.

Cabot Stock of the Week 351

The bull market that began in March 2020 rolls on, and the good news is that growth stocks are now looking stronger, as hopes for rapid growth outweigh fears of inflation. Today’s recommendation is a leading player in the semiconductor machinery industry, which has been in the news lately because of chip shortages, but should boom as global growth accelerates. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor and here are Mike’s latest thoughts:

ASML Holding (ASML)
Despite the carnage in growth stocks from mid-February through early May, chip stocks didn’t give up the ghost. The VanEck Vector Semiconductor Fund (SMH) did pull back a maximum of 16% from high to low, but given the prior run, that looked like a normal consolidation. And now the group has perked back up to within 3% of its prior high.

Of course, the major fundamental trends for chip stocks are positive as everything becomes digitized. But what’s interesting these days is there’s a chip shortage that’s actually restricting production of many items (cars being the most notable one), which makes chip equipment makers one of the top sectors out there. And that’s led to some massive expansion plans among top foundries. Taiwan Semi, for example, has a $100 billion investment already underway for the next three years, while Samsung is aiming to spend $151 billion over nine years! Eventually that will lead to overcapacity (such is life in the semiconductor space), but right now it’s boom times for equipment makers.

But which stock to pick? Many look fine, including grandaddy Applied Materials (AMAT) and its peer Lam Research (LRCX). But our pick is ASML Holding, a Dutch firm that (unbeknownst to most people) sits at the heart of the entire chip industry, and hence, much of the digital world. The reason is that the firm has a monopoly on specific types of chip equipment machines that are needed to produce the world’s most advanced chips for 5G, electric vehicles, artificial intelligence and more.

That’s right—ASML is the world’s only producer of so-called extreme ultraviolet lithography (EUV) machines that use light with wavelengths of just 13.5 nanometers, allowing customers to etch smaller and smaller integrated circuits for the most demanding applications. All of the leading chip makers (including the two mentioned above, plus Intel and others) are customers and are boosting purchases of these expensive machines (something like $175 million each!) in a big way.

Indeed, sales growth actually accelerated for much of last year as orders picked up, and business in Q1 went bananas—sales rose a whopping 90% while earnings more than tripled and easily surpassed estimates. Bookings came in at $5.8 billion as the firm took in 73 new EUV orders, which led management to up their guidance: They’re now looking for 30% top line growth, while analysts are looking for a 45% bump in earnings with another 20% gain next year—all of which are likely to prove conservative.

Of course, the valuation is high (52 times trailing earnings), and again, with so much capacity expansion and huge orders, there’s probably a downside to this mountain once chips flood the market. But for the next few quarters, it’s likely to be boom times for the chip equipment sector in general and ASML Holding in particular.

As for the stock, ASML has always been a bit stronger than the group as a whole, and that’s held true since last year’s market crash, as shares hit fresh highs last May before taking a three-month breather. The breakout in November coincided with the upmove in the broad market, and the stock has been strong since, with just one shakeout (in March as growth stocks got hit). More recently, ASML held firm near its 10-week line and above the 600 area before stretching toward its highs.

Admittedly, the stock isn’t in the first inning of its overall advance, and volume on the latest uptick hasn’t been anything to write home about. But the path of least resistance is clearly up, and the stock spent about three months going nowhere before showing some spunk of late. We think ASML presents a solid risk-reward situation here.

Current Recommendations

The addition of ASML to the portfolio means we are now once again fully invested, with twenty stocks. In a bull market, that’s good! And none deserve to be sold, so we’ll stand pat for now. Next week we’ll have to sell something, and it will be interesting to see who gets the axe! Details below.

Changes
None

Barrick Gold (GOLD), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has pulled back a bit further, but the uptrend that began in February remains intact. In his update last week, Bruce wrote, “Barrick shares slipped and have about 11% 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. Commodity gold ticked up to $1,909/ounce. On its recurring $.09/quarter dividend, GOLD shares offer a reasonable 1.5% dividend yield. Barrick will pay an additional $0.42/share in special distributions this year, lifting the effective dividend yield to 3.2%.” 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 update last week, Tom wrote, “This technology powerhouse hasn’t done much since being added to the portfolio in January because of unfortunate timing. The tech sector has sputtered temporarily as cyclical stocks have taken off. But it’s short-term stuff. Broadcom is an elite technology company with over 90% of internet traffic using its products. We’re in the midst of a technological revolution and 5G is coming.” HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, broke out to a new high last week, pulled back minimally over the next two days, and then closed at a new high Friday! In his update last week, Tom wrote, “This infrastructure partnership stock is a good value and paying a good dividend ahead of improving earnings. The sobering market should continue to embrace defensive companies like this and Brookfield has the added advantage that the infrastructure subsector is becoming increasingly popular with investors.” 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 two weeks ago, and has bene working its way higher since. In his latest update, Bruce wrote, “KO shares have about 16% upside to our 64 price target. While the valuation is not statistically cheap, at 25.4x estimated 2021 earnings of $2.18 (unchanged in the past week) and 23.5x 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, continues to build a base in the 6 area, though there’s still the possibility of a repeat dip to 5.25. Fundamentally, the company is thriving—as are all the major U.S. marijuana companies—so I have little doubt that eventually this stock will be higher. But this is a low-priced stock in a young sector so volatility should be expected. BUY

Five Below (FIVE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been working to break out above resistance at 200 that has constrained it since January. In his update for Cabot Growth Investor last Thursday, Mike wrote, “FIVE has been stagnant for the past few months net-net and has weakened in recent days, so tonight’s earnings report could make or break the stock—and determine whether or not we’ll keep holding. Analysts are expecting sales rose to $551 million (up 139% from last year’s depressed pandemic quarter) with earnings of 65 cents per share (up from a loss). We have no doubt business remains good; the question is what the company says about the future when stimulus checks aren’t likely to be repeated and whether the company (as it has done occasionally in the past) is boosting investments in distribution and technology. (All else equal, the company should be nearing the end of a good-sized investment phase, but we’ll see what management says.) As we’ve written numerous times, in our heart we’re optimistic, thinking that Five Below is relatively early in a new advance that kicked off last September, with this year’s fundamental rebound kicking off what should be a string of many annual 20% to 25% gains in sales and earnings. As for the stock, it’s not awful by any stretch (14% off all-time highs), but it also hasn’t bounced at all during the past two weeks. We’ll let the stock decide—a decisive upmove could kick off a new advance, while a dud could have us pulling the plug. We’ll be in touch with any changes.” Well, revenues were $598 million, and earnings were $0.84 per share (both beating estimates handily) and the stock popped higher on big volume Friday morning, so all is well for now. HOLD

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, continues to hit new highs! In his update last week, Bruce wrote, “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. Automobile chip maker Renesas said that it has returned to nearly full production sooner than anticipated following a devastating March 19^th fire. GM said it will re-start production at five assembly plants this week or next week as tight chip supplies appear to be easing.” And just today Bruce raised his target to 69, writing, “Given GM’s impressive management, earning power and its positioning to be a winner in the eventual EV future (we see the industry transition as gradual, and occurring slower than the consensus which implies an aggressive adoption rate for EVs), and its undervaluation on reasonably conservative metrics, we are raising our price target to 69.” 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 featured here two weeks ago, was bought on a normal correction (from 575 down to 500) and that’s pretty much where the stock is now, building a base in preparation for its next advance. Tyler doesn’t provide regular updates on these stocks (because he recommends so many), but Mike Cintolo mentioned HUBS in his latest Cabot Growth Investor, writing, “HUBS hasn’t exactly powered ahead during the latest rally, but it’s still in good shape (about even with its February highs) and business has accelerated in recent quarters.” BUY

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, was cheap when we bought it; now it’s not. But Bruce is holding, as the stock is very close to closing at a new high. In his update last week, he wrote, “TAP shares trade at 15.0x estimated 2021 earnings of $3.87 (unchanged this past week). Estimates for 2022 were unchanged at $4.20. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 9.7x current year estimates, still among the lowest valuations in the consumer staples group and below other brewing companies.” And just today he raised his target price to 69, writing, “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.” 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 I think every pullback toward 70 provides a nice buying opportunity. BUY

Nvidia (NVDA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, released an excellent first quarter report two weeks ago and the stock has been hot since! So Mike recommended it again in last Monday’s Cabot Top Ten Trader, writing, “Nvidia (covered in the April 19 report) has had a busier year so far than most of its semiconductor peers, setting several records in the first quarter and with several irons in the fire. The red-hot video game market is the main source of the company’s recent successes, with record-breaking Q1 gaming sales of $2.76 billion increasing 106% from a year ago (up 11% sequentially), driven by the firm’s RTX 30 series GPUs released in late 2020. Nvidia also just announced with fanfare that new laptops with RTX GPUs, which offer ‘huge boosts in performance,’ will be released this summer. The data center segment also posted a record quarter, with sales rising 79% (up 8% sequentially) to just over $2 billion. Management indicated the data center business is expanding as industries worldwide adopt Nvidia’s AI Enterprise software suite to facilitate computer vision, natural language understanding and so-called recommender systems. Total revenue in Q1 was $5.7 billion—also a record—and up 84%, while per-share earnings of $3.66 came in 38 cents above estimates. The company said it’s making progress with a planned acquisition of Arm, which Nvidia sees expanding its GPU and AI technologies to a wider range of end markets, including mobile and the Internet of Things (IoT). Although auto segment revenue was flat in Q1, Nvidia sees a massive growth opportunity in self-driving vehicles through the advancement of its Drive autonomous vehicle platform, as well as Software as a Service (SaaS) cloud-based recurring revenue. NVDA got off to a roaring start following its 2020 rebound from the March crash low of 180, hitting 600 by September. But that was it for a while, with a long sideways phase and, this year, the stock’s had two failed breakout attempts, one in mid-February and the other in mid-April—both times the market pulled it back down. However, the 3rd time could be the charm, as NVDA has galloped off its 200-day line on huge volume both before and after the report. We’re OK buying here but with a liberal loss limit.” BUY

Palantir Technologies (PLTR), originally recommended by Carl Delfeld in Cabot Explorer and featured here last week, has been trending higher since releasing an excellent first quarter report on May 11. In his update last week, Carl wrote, “Shares were up 14% in the stock’s first week in the Explorer portfolio as the company signed a deal worth $111 million with the United States Special Operations Command (USSOCOM) to continue to serve as its enterprise data management and AI-enabled mission command platform. 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 but 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 like it may close at a new high today. In his update last week, Tom wrote, “This is another great income stock that just made another 52-week high. As we move beyond the pandemic recovery, a high yield on a cheap stock should be compelling to investors. I expect O to slowly forge higher the rest of the year.” BUY

Roblox (RBLX), originally recommended by Mike Cintolo in Cabot Growth Investor, and featured here two weeks ago, hit record highs on eight of the past ten trading days, but now it looks like it’s time for a correction—of unknown depth and duration. In his update last week, Mike wrote, “RBLX is a young, hot growth stock with all the makings of a big winner. We wrote about the company and the stock in each of the past two issues (in the Other Stocks of Interest section), so we don’t have much new to add on that front. Near term, we think the firm’s metrics showing that user growth and bookings remained in fast-growth mode in April have convinced many big investors that Roblox isn’t just a pandemic play, and longer term, this looks like a unique platform that has endless gaming and other applications. Chartwise, the stock is coming off of three straight huge-volume buying weeks since earnings, with more gains in recent days, too. While there are no guarantees in this market environment, such breakout-and-follow-through action certainly looks like a kickoff on the upside. We’re keen to average up here, but we’re only up a smidge so far and RBLX is very volatile, so we’ll stand pat, but if you don’t own any, we’re OK grabbing a half-sized stake here.” BUY

Schlumberger (SLB), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to hit new highs, as economic reopening bodes well for the energy sector in general. If you don’t own it yet, you can buy on any normal pullback. BUY

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, looks just fine. And now the stock has been recommended by Mike Cintolo in Cabot Top Ten Trader, where he wrote, “Sea is a mobile app company built around the ubiquity of the smartphone in southeast Asia, India and Latin America. In some cases it’s the only network-connected device people own, which makes phones the gateway for consumer shopping, banking and entertainment, areas Sea targets with its three divisions. The mobile games division, dubbed Garena, makes multi-player shoot ‘em up games including Free Fire, the most-downloaded mobile game world-wide (!) and in-game purchases made it the highest grossing game in Sea’s three primary regions last year. Individual sales are small, about $1.70 per user in Q1, but it adds up with a large user base; Sea’s digital entertainment sales more than doubled to $781 million in the period. Last year, Free Fire-related content tallied 72 billion views on YouTube, the most of any game, signifying a robust franchise and underpinning a move into esports, where fans watch and attend video game matches like other sporting events. Then there’s Sea’s Shopee division, which is effectively a $452-million (Q1 sales) Amazon competitor, a mobile based storefront that commands top market share in Indonesia, southeast Asia and Taiwan. Tying Sea’s access to users together is SeaMoney, a financial services hub. It’s the smallest of Sea’s businesses ($152 million Q1 revenue) but potentially the most lucrative as mobile banking’s scale can offer users cheap transactions and sell larger loans and mortgages. None of that means Sea makes money–it lost $2.78 a share last year on $2 billion sales–but the story is typical tech: Command market share first before converting dominance into profits. Indeed, sales are expected to rise 86% this year and another 50% next, and both of those should prove conservative.” 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. After peaking at 900 in January, it pulled back to 600 (roughly) in March, and that has served as the bottom for the stock since. If you’re gung-ho on owning the stock, I think this is a decent entry point (and it’s nice that the spotlight on Musk seems to have dimmed a bit in recent months) but I’ll leave it rated hold because less famous growth stocks generally offer better investment opportunities. 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. 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. 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 14, 2021.

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