March 1, 2021

Last Tuesday the market sold off big-time. Today it recovered equally big. But many stocks haven’t bounced as much as they fell, and some of them are in our portfolio. That’s the general reason for my four sell recommendations today.

Still, while there are growing divergences, the bull market is not dead yet, and today’s recommendation is a mass-market retail name whose stock looks great as investors look forward to more expansion.

Cabot Stock of the Week 337

While some segments of the broad market have experienced a sharp correction over the past month (growth stocks in particular), the broad market has not fallen apart; in fact, many indexes hit new highs just last week. And, of course, today’s big jump was rather impressive. Thus, while I remain well aware that the market is ripe for a major correction, the fact is the market continues to work its way higher and therefore I have no choice but to keep recommending strong stocks. This week’s recommendation is a retail name with great growth potential as it follows one of our favorite expansion models. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor and here are Mike’s latest thoughts.

Five Below (FIVE)
As growth investors, many of our recommendations tend to be in the technology, Internet, cloud and medical space; that’s where many of the world’s most revolutionary breakthroughs come from, so that’s often where our ideas come from.

But truth be told, one of our favorite oases to find durable growth stories is retail, as the market’s history of big winners is littered with firms that developed new retail concepts that flourished over many years. We’re especially high on cookie-cutter stories, where firms can expand business simply by growing the number of locations they operate—combined with their online presence, there’s plenty of built-in growth if you can find a unique story. McDonalds is the ultimate example of a retail cookie-cutter winner, but there are dozens (Home Depot, Ulta, Chipotle) of others to pick from.

Our top stock with this theme these days is Five Below, which has carved out a space in between the true dollar stores and mid-tier retailers to offer a variety of goods (mostly for teens and pre-teens) in tons of categories: toys and games, beauty, party gear, technology, arts and crafts, sports, games, décor and much more. As the name suggests, the core of its offerings are priced at $5 or less, which has obviously been a hit and makes the company a new kind of dollar store. But it’s also been expanding its offerings via its so-called “Five Beyond” program, with some select merchandise (much of it tech-related) priced as high as $10, and that has been going well.

While this might seem like “only” a bunch of cheap stuff, management has proven deft over the years of getting in-demand merchandise (including holiday gear) and even capturing the occasional craze (like the fidget spinner thing a few years ago).

In terms of the business, the big attraction here is Five Below’s best-in-class economics. For years, the average new store opening recouped its pre-opening costs (including marketing) within a year. During the pandemic, that backed off a bit, but even then, the payback was around 15 months, and the top brass believes that’ll improve going ahead.

Those economics has allowed Five Below to rapidly expand its store count without draining the bank account. Again, last year, the store count grew less than normal, but in 2021 and beyond, the company plans to be back on track with 15% to 20% annual growth in the store base. And it should be able to keep up that breakneck pace for a long time; Five Below ended last year with around 1,000 stores but believes it has the potential for at least 2,500 (with management emphasizing the “at least” portion of that forecast in recent presentations).

Moreover, the pandemic brought one good thing in that Five Below was forced to accelerate development of its website and e-commerce capabilities, which weren’t great two years ago. But that should prove to be another tailwind to go along with the cookie-cutter aspect of the story.

Given all of the above, it’s not surprising that growth was rapid and reliable for years, but the stock actually stalled out in late 2018 as investor perception changed. The reason: The U.S.-China trade war, which did slow growth some and threatened the firm’s margins. Then came the pandemic and earnings likely shrank 29% last year.

But that’s in the past, and Wall Street expects a huge rebound this year, with earnings back above $4 in this fiscal year and, more importantly, Five Below getting back on the growth track it was on years ago (20%-plus sales and earnings annually). And that’s why the stock has been strong; FIVE busted loose from a two-year consolidation last September and glided nicely higher for months.

Now, like most growth stocks, the stock has hit some turbulence, but it’s successfully tested its 50-day moving average several times over the past month, and now, six weeks after its most recent top, FIVE seems ripe for a breakout to new highs.

Current Recommendations

Last week’s big Tuesday shakeout did some real damage to many of the stocks in our portfolio—and their weak rebounds since have given us some real clues as to which stocks in the portfolio should now be weeded out. In fact, there are four. In general, the growing divergences in the market (indexes strong but more and more stocks lagging) look like a sign of a market that’s in its final inning(s). Details below.

Changes
Arcosa (ACA) to Sell.
CrowdStrike (CRWD) to Sell.
Elastic (ESTC) to Sell.
ElectraMeccanica Vehicles (SOLO) to Hold.
Nuance Communications (NUAN) to Sell.
Progyny (PGNY) to Hold.
Uber (UBER) to Hold.

Arcosa (ACA), originally recommended by Tyler Laundon in Cabot Early Opportunities, gapped down last Thursday after releasing its quarterly report and soon after, Tyler recommended selling to his readers, writing, “Arcosa released an uninspiring report on Wednesday that was particularly ill-timed given yesterday’s market retreat. The company missed across the board. Revenue was up 2.7% to $459 million, missing by $4.7 million while adjusted EPS of $0.33 missed by $0.08. Guidance for 2021 also missed. Nothing to see here folks. The stock sold off and we have a modest loss of around 7%. Let’s move on.” Luckily, we bought on a pullback and thus are roughly at breakeven as I write. Still, the money can likely do better elsewhere. SELL.

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, and featured here last week, was bought on the market’s big dip Tuesday (lucky timing) so we’re off to a good start. If you haven’t bought yet, you can buy now. BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor, is in a similar business, but its stock is doing just fine, three weeks off a record high and tracking its 50-day moving average higher. If you haven’t bought yet and you could use a growing and high-yielding infrastructure company in your portfolio, you can buy here. BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, also has a high dividend yield—and Bruce says it’s still cheap. In his latest update, he wrote, “The company raised its quarterly dividend by a cent to $0.42/share, a hike of about 2%. The stock has about 26% upside to our 64 price target. While the valuation is not statistically cheap, at 23.7x estimated 2021 earnings of $2.14 and 21.8x estimated 2022 earnings of $2.32 (both estimates unchanged in the past week), the shares are undervalued while also offering an attractive 3.3% dividend yield.” BUY.

CrowdStrike (CRWD), originally recommended in Cabot Growth Investor by Mike Cintolo, gapped down sharply last Tuesday and while the stock has stabilized since, Mike suggests selling and I agree. Here’s what he wrote: “CrowdStrike’s fundamental story hasn’t changed one bit, but we decided to pull the plug on Tuesday’s special bulletin for a couple of reasons. First, the stock’s drop from its recent high of 250 all the way below 200 on Tuesday’s low looks abnormal; in fact, even now, shares are no higher than they were in mid-December, which isn’t awful but does hint at some stalling of late. Second, despite holding the stock for a couple of months, our profit cushion was minimal—and after having a 20% profit, our rules prevent us from letting the trade turn into a loss. If you still own CRWD and want to use a stop near Tuesday’s lows (near 198), we wouldn’t argue with that, but the hero-to-zero action (new highs to gapping below its 50-day line in just a few sessions) prompted us to take our small profit (9% on the average of our two buys) off the table. If shares set up properly down the road, maybe we’ll take another swing at CRWD, but right now the buyers look to be losing control.” SELL.

Elastic (ESTC), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is another stock that turned down after releasing its fourth-quarter report last week, essentially wiping out our small gain—and the rebound since has been unimpressive. SELL.

ElectraMeccanica Vehicles (SOLO), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is a speculation—make no mistake about that. Even I have doubts about the marketability of the company’s little three-wheeled car. But I recommended the stock on the strength of the chart and the fact that the company wasn’t valued sky-high like so many electric car manufacturers. And I’m going to continue holding today, because while last week’s decline has made it our biggest loser, the stock’s chart does show support at 6. Downgrading to Hold. HOLD.

General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, pulled back normally with the market last week but looks fine. In his update last week, Bruce wrote, “We see fair value at 62. The shares have been weak recently on disappointment with the 2021 guidance, and on rising interest rates. GM is modestly vulnerable to rising interest rates as many of its vehicles are financed. Also, GM Financial’s borrowing costs are tied to interest rates while its new loans may not be able to fully capture higher interest rates – it might be a difficult conversation for GM Financial to pressure GM Automotive’s sales by raising its car loan interest rates. And, GM Financial’s portfolio of loans will slip in value when rates rise. The stunning valuation of Lucid’s SPAC deal, at something over $60 billion, makes us wonder about a massive bubble – if it pops, GM shares would likely be dragged down. However, the weaker the competition, the stronger GM’s position. Also, the freak Texas winter storm that crippled the entire state’s electricity grid has us wondering just how fast consumers may be willing to give up their gas-powered cars. The transition to EVs may have been pushed back a few years. For GM, this means their immensely profitable gas-powered truck franchise would live longer. Yet is also means that their massive capital spending push would be less productive and take longer to generate meaningful profits. For now, we will hang onto GM shares. On a P/E basis, the shares trade at 8.5x estimated calendar 2022 earnings of $6.33 (down about 4% this past week).” HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, remains a long-term hold, as I think growth prospects are great for the largest operator of hotels in China. Since hitting a record high two weeks ago, the stock has pulled back minimally. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, sold off three weeks ago after a disappointing quarterly report, but the stock was actually up last week, as investors abandoned growth and reached for value. In his update last week, Bruce wrote, “Shares have about 31% upside to our 59 price target. The shares are incrementally more attractive because of the price drop, not less. We see no change in the company’s longer-term prospects regardless of the earnings report, and now have a chance to buy more shares at a lower price. TAP shares trade at 11.7x estimated 2021 earnings of $3.87 (down 1 cent this past week). This valuation is low, although not the stunning bargain from a few months ago. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 8.3x current year estimates, among the lowest valuations in the consumer staples group and well below other brewing companies.” HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, sold off with the market last week, but has rebounded since—and the long-term trend looks absolutely fine. HOLD.

Nuance Communications (NUAN), originally recommended by Tyler Laundon in Cabot Early Opportunities, fell below its 50-day moving average last week and remains down there; buyers have not materialized. And that represents a change in character for the stock, which had been in an uptrend for nearly a year. Long-term prospects for this voice-recognition giant remain excellent, but short-term, the signals tell me it’s likely in for a cooling-off phase, so I’m going to sell here. SELL.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, sold off sharply with the market last Tuesday but actually finished up for the day—which was impressive. In his update last week, Mike wrote, “PINS seemed to suffer from some forced selling during Tuesday morning’s downturn, dipping to nearly 70(!) before buyers began snapping up shares; the stock actually closed up on the day and, while it’s dipped again with everything else since, the overall pattern is constructive. Helping the overall cause may have been a very bullish Investor Day from Snap; while the two companies don’t compete directly, both are benefiting from the same trend as online advertisers look for more avenues (rather than just Facebook, Google and the like) to get in front of younger potential customers (like Snap’s user base) or at an earlier stage of the buying process (for Pinterest). Whatever the exact reason, the firm has all the numbers to make big investors drool and a big-picture story that’s hard to match.” HOLD.

Progyny (PGNY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a record high last week before the company released an excellent quarterly report; revenues were up 54% to $100 million, while EPS hit $0.07 per share. Both topped estimates. But the stock sold off the next day, presumably as a result of the lower-than-expected growth projected for 2021; management expects revenue of $520 to $540 million, reflecting growth of 51% to 57%. Our loss is now at the level where selling is a strong possibility. But I like this story, so I’m going to give the stock a little more rope; 40 is an obvious line in the sand. Downgrading to Hold. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, bounced off its 50-day moving average last Friday and gapped up at the open today, so technically, all is well here. In his latest update, Carl wrote, “The company announced this week it is expanding into food delivery on top of its core drivers of gaming, e-commerce and fintech. 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; (3) major new game launches; and (4) the company’s move into India.” HOLD.

Spotify (SPOT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a record high last Monday but plunged with growth stocks on Tuesday and finally found support at 300. A fall through here would likely be trouble, but for now, the uptrend remains intact (and the growth potential enormous), so I’ll hold. HOLD.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is definitely in a cooling-off phase, which is absolutely normal given that the stock jumped over 700% in 2020. And now with a slew of new electric vehicle models arriving to give consumers choices, there’s real competition on the horizon. Still, Tesla is selling all the vehicles it can make (without advertising!) and making rapid progress on its Gigafactories in Austin and Berlin. Plus, it’s ramping up its solar roof operations, and it continues to grow its energy division, which has the potential to someday grow larger than the automotive operation. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, bounced off its 25-day moving average last week and was up today, so it’s definitely one of the strongest stocks in the marijuana sector. But I remain concerned that the sector is in a correction phase so the best I can rate it now is a hold. Trulieve is one of the U.S. leaders in the industry, so there’s a good chance (though no certainty) the stock will be in my Cabot Marijuana Investor portfolio for years to come, so if you want to try to hold long-term, that’s great. Still, I recommend that you consider taking partial profits here (or use stops) because there’s substantial short-term downside potential; this stock was at 6 a year ago. HOLD.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, has fallen below its 50-day moving average but found support at 50—so it’s weak but there’s hope. In last week’s update Mike wrote, “UBER looked set for glory after a beautiful shakeout and recovery a couple of weeks ago, but the stock has come under pressure once again due to a variety of issues—first, the Q4 report was just OK, then the U.K. said ride sharing drivers are employees and now there’s news that a big Chinese ride share firm is entering Europe (likely leading to some price competition). Honestly, at heart, we remain optimistic here: Uber is the leader in a business that should rebound sharply in the months ahead (Rides) and is also the hands-down leader globally in delivery services of all kinds, a market that should grow many-fold in the years to come. However, we also recognize that we’re back to around breakeven on our position (cost basis just under 52) and, like many other names, the up-down action in recent weeks is a yellow flag. We’re willing to give UBER a bit more room to maneuver, but a drop back into the upper 40s would call into question the uptrend.” Downgrading to Hold. HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, was so high a month ago (up above 60) that after falling 40%, it’s just down to its 50-day moving average, so technically still in an uptrend. Last week the company released a quarterly report with no real surprises; the next test flight (a retest of the recently aborted one) is scheduled for May. In his latest update, Carl wrote, “If the retest is successful, the company plans a second powered flight, a key step needed before revenue-generating commercial flights can begin. Shares have more than doubled so far in 2021 and we are up 7X since we added the stock to the Explorer portfolio. We recently sold a half position and will let the remaining half position ride.” HOLD.

The next Cabot Stock of the Week issue will be published on March 8, 2021.

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