March 15, 2021

The market rallied nicely last week, and growth stocks joined the crowd (which is good), but today’s strong open didn’t last and now we’re seeing deterioration across the board, reminding us that the market is a two-way street. Plus, in the background is the fact that investor sentiment is so high, and the economic news has been so good, that eventually we’re going to need a big correction.

Still, looking at the stocks in our portfolio, I see no need for any ratings changes today.

As for today’s new recommendation, it’s a growth stock that hit a new high just last Friday and has a long runway of growth ahead of it as its young industry expands.

Details inside.

Cabot Stock of the Week 339

The broad market remains in a diverging pattern, so there’s still a very good chance that a long-term market top is being formed—and the wild action in SPACS, EV stocks, bitcoin and other digital assets confirms that view. Because of that, our portfolio is now holding some cash. But last week the Nasdaq strengthened dramatically, so right now, it looks like aggressive investing in the best growth stocks can still pay off. That’s where we’re aiming this week, with a company that’s poised to lead a fast-growing new sector. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor and here are Mike’s latest thoughts.

DraftKings (DKNG)
Many of the market’s biggest winners over time come from companies that lead entirely new industries. One great example of this was XM Satellite Radio back in 2003; before them (and peer Sirius), there was no satellite radio sector to begin with! It was a similar story when we hopped on First Solar back in 2007—back then our research system put the stock in the “Energy-Other” industry, as there was no solar sector to speak of.

We see a lot of similarities between those examples and DraftKings (DKNG), which is positioned to be one of (if not the) biggest players in online sports betting, iGaming (online casino gambling) and daily fantasy sports, which has taken off in recent years.

While you might not think of gambling as a true mass market, making it available to the average Joe has more and more people throwing down $10 or $20 on their favorite team. In fact, the numbers are likely to be mind-boggling—based on some of the oldest markets in the U.S. (like New Jersey), DraftKings believes the U.S. online sports betting market will eventually be $22 billion per year.

Meanwhile, iGaming should be even larger: Ever since DraftKings entered the New Jersey iGaming market in 2018, growth has accelerated, with that state’s revenue climbing 62% in 2019 and accelerating to 101% last year, to a whopping $970 million. Based on this, the firm thinks the U.S. iGaming market could be $40 billion at maturity! And we haven’t even mentioned the potential internationally; in Canada, where legalization has some momentum, online sports betting and iGaming could be a $5 billion to $8 billion opportunity, while the U.K. and Australia have big potential as well.

Exact numbers aside, this market is set to grow 10- or 20-fold down the road as states increasingly legalize online gambling of one sort or another. Today, 15 states (including Washington, D.C.) have legalized online sports betting, while six are good to go with iGaming, and those figures are heading up every couple of months.

While there will be many players in the sector, DraftKings has been built from the ground up for this new reality. (Its leadership position in daily fantasy sports, with five million paid users and nine years of data and marketing experience, provides an edge.) The firm is up and running in 12 states serving about 26% of the U.S. population, more than any of its competitors. Not surprisingly, it’s also cranking out impressive market share; at last week’s Investor Day, DraftKings’ management claimed around 30% market share in online sports betting and 19% in iGaming nationwide.

A big part of the reason for that is because this isn’t just some random website that allows you to place a bet; the company has inked dozens of deals with leagues, select teams and big media (like ESPN) that broaden its reach and mindshare. Moreover, on the technology side of things, it has the highest-rated sportsbook app in the App Store—a big reason for its elevated (85% to 90%) customer retention rates and positive same-customer revenue figures.

Long story short: DraftKings is the leader in what’s effectively an entirely new industry that should grow many-fold in the years ahead. If management makes the right moves, the company should get much, much larger in time. Even today, it’s doing very well; while the bottom line is deep in the red, revenues leapt 98%, monthly unique payers were up 44% and revenue per paying customer was up 55%. Better yet, the company significantly hiked its guidance, looking for 48% top-line growth in 2021, which should prove conservative.

The stock is about as volatile as can be, but we like the fact that shares (a) made no net progress for seven months (last June through January), (b) began perking up even as the market wobbled and (c) shot right back to new highs last week as soon as the market started to bounce.

Current Recommendations

Most of our stocks rallied nicely last week, none fell apart, and none hit their price targets, so there are no ratings changes this week. If you’re feeling underinvested, you’ll find a handful of recommended buys below, but if you’re feeling overinvested, you should take care to take partial profits where you might be overexposed. Things will change, and my fear, given all the good economic news these days, is that the market’s next major move is down. Details below.

Changes
None

APi Group (APG), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here last week, is off to a great start and can still be bought. The company, which provides a wide range of safety and industrial services (like fire alarms), will report fourth quarter results on March 24, before the market open. BUY.

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has rallied strongly over the past week, but that just brings it up to its 50-day moving average, so it’s not out of the woods yet. In his update last week, Tom wrote, “Even this normally steady climber is getting hit by the selloff in the technology sector. And the fall came after the company reported stellar earnings that beat expectations. Broadcom posted 26% earnings per share growth and 14% revenue growth versus last year’s quarter. The company also guided to better-than-expected earnings for next quarter. But sector selloffs tend to drag everything down. Despite being up 60% over the past year, Broadcom still sells at a reasonable level of 15 times forward earnings. I consider the recent selloff to be a buying opportunity.” BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, bounced off its 50-day moving average a week ago and remains above it today, poised to eventually climb above its February high of 55. In Tom’s latest update, he wrote, “The infrastructure partnership is well positioned for the rest of the year despite going sideways lately. It’s been a great market for cyclical stocks while many other stocks and sectors are just sort of treading water. The focus on open-up plays has left BIP in the buy range ahead of a promising year. Earnings should be headed higher as new projects come online and transportation and energy assets regain traction. It’s also true that infrastructure is an increasingly popular sector, and it could get a further boost as it becomes a focus of the new Administration in Washington.” BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, has now given back the gains of its big gap up last Monday, but remains above its 50-day moving average, so looks like a good buy here. In his latest update, Bruce wrote, “Perhaps indicative of Wall Street’s fickle mindset, RBC just upgraded their view of Coca-Cola shares to an “outperform” and raised their price target to 60 from 55. On January 4th, the company downgraded the shares to “sector perform,” calling the shares expensive at 55. We anticipate that they won’t be the only bank to rediscover Coca-Cola, as JPMorgan and Deutsche Bank still have a neutral view. The stock has about 25% upside to our 64 price target. While the valuation is not statistically cheap, at 23.9x estimated 2021 earnings of $2.15 (unchanged in the past week) and 22.1x estimated 2022 earnings of $2.32 (unchanged in the past week), the shares are undervalued while also offering an attractive 3.3% dividend yield.” BUY.

Five Below (FIVE), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here two weeks ago, rallied with other growth stocks last week and is now aiming to break through resistance at 200, where it’s already been rebuffed twice this year. In his latest update in Cabot Growth Investor, Mike wrote, “FIVE finally got caught up in the market’s downdraft last week, dipping as low as 172 on Friday before finding support. Yes, the chart is sloppy of late like most things growth-related, but shares are just 6% off their highs and are about two months into a rest area after their strong September-mid-January advance. The future path of growth stocks will be important, but as we wrote last week, so too will be earnings. Five Below is set to report holiday quarter results next Wednesday (March 17), and while the Q4 results will be key (sales up 22%, earnings up 7% is the expectation), more important will be any update on same-store sales trends in February and March as well as the full-year outlook. At heart, we’re optimistic FIVE will be nicely higher down the road given its best-in-class growth story and its two-year breakout last September, and given that we have a solid profit and have already sold one-third of our shares, we’re willing to give our remaining portion room to retreat if necessary. We’ll stay on Buy, but keep any new positions small this close to the report.” BUY.

General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, broke out to a record high on Friday and has pulled back minimally today, so this investment is working! In his update last week, Bruce wrote, “GM is close to committing to building a second battery factory, likely in Tennessee, in addition to the $2.3 billion facility in Lordstown, Ohio. The new facility makes strategic sense as GM wants to remain in control of its supply chain, at least until a full-fledged battery production industry is built out. Producing batteries also would give GM some optionality – they could produce batteries for other vehicles that don’t compete with its line-up, or for home battery back-up or many other uses. If other car makers can’t control their own battery production, GM would have a considerable strategic advantage. U.S.-based battery production may also attract strategic interest and financial support from the federal government, adding to its appeal. From a historical perspective, this follows how the auto industry has evolved: originally nearly all sourcing, production and assembly was done in-house (vertically integrated). Then, as the supply chain matured and could safely be outsourced, the majors spun off or sold their component makers, including the enormous spin-off of Delphi Automotive in 1999. We see the battery business as a low-return operation – once its strategic value fades GM will likely spin this out, perhaps in a decade or two. The shares have 14% upside to our 62 price target. On a P/E basis, the shares trade at 8.7x estimated calendar 2022 earnings of $6.26 (unchanged this past week). The P/E multiple is helpful, but not a precise measure of GM’s value, as it has numerous valuable assets that generate no earnings (like its Cruise unit, which is developing self-driving cars and produces a loss), its nascent battery operations, its Lyft stake and other businesses with a complex reporting structure, nor does it factor in GM’s high but unearning cash balance which offsets its interest-bearing debt. However, it is useful as a rule-of-thumb metric and we will continue its use here. Our 62 price target is based on a more detailed analysis of GM’s various components and their underlying valuation.” 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 a month ago, the stock has pulled back normally but remains well above its 50-day moving average. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, sold off five weeks ago after a disappointing quarterly report but has been climbing slowly higher since then. In his update last week, Bruce wrote, “TAP shares lifted 5% in the past week and have about 25% upside to our 59 price target. Earnings estimates remain stabilized with no deterioration this past week. TAP shares trade at 11.4x estimated 2021 earnings of $3.87 (unchanged 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 8.6x 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, has been buffeted by fears of rising interest rates, actually falling through its 200-day moving average a week ago before rebounding above it, but Tom remains bullish on the stock. In his update last week, he wrote, “Normally an up-trending juggernaut, the alternative energy utility just had a nasty 20% pullback from the high of late January. There doesn’t seem to be any news at the company itself. The market has been shunning safer plays and utility stocks amidst the recent cyclical stock rally. As a high-flying utility, NEE is taking it on the chin as the sector falls from favor. I think this represent a rare buying opportunity ahead of very promising days for alternative energy stocks as the new Administration puts more focus on clean energy.” BUY.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, was hit hard by the growth stock selloff but it bounced strongly last week with the group so we’ll sit tight for now. In his update last week, Mike wrote, “The strongest growth stocks of the past few months have taken the hardest hits, and PINS certainly was one of those, plunging to nearly 60 last week before finding support. There are some worries out there that, as the pandemic dissipates, much of the online shopping/researching surge we saw last year will do the same. But we think that view is off—growth here was already picking up before the virus, and no vaccine will change the fact that Pinterest has a one-of-a-kind offering that will attract tons more advertisers (and, thanks to improved targeting tools, higher revenues per user) that are looking to influence potential buyers earlier in the process. Back to the stock, we’re not going to pretend the recent action hasn’t been ugly, but interestingly, the stock has had only two big-volume days on the downside, and one of those was actually supporting action (last Friday). We still believe the odds favor PINS will round out a new launching pad in the weeks ahead—though a dip into the mid- to upper-50s could change our mind. Right now, we’re sitting tight.” HOLD.

Progyny (PGNY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is a fertility benefits provider with a good growth story. The stock bottomed with other growth stocks a week ago, but has rallied since, and enjoyed an impressive gap up last Wednesday. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, has moved generally in sync with growth stocks, even though it’s an Asian company, but the rally over the past week hasn’t quite brought the stock up above its 50-day moving average. In his latest update, Carl wrote, “The company recently reported fourth-quarter and full-year 2020 numbers with 101% year-over-year revenue growth. Revenue increased to $1.6 billion in the last three months of 2020 from $777.2 million a year earlier. We have taken profits several times over the remarkable rise of this stock so I’m keeping SE a hold. If the stock pulls back sharply with the market, I plan on moving this to a buy again.” HOLD.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was red-hot in late January, trading at 900. But a week ago it was at 600, stung not only by investors’ general retreat from growth stocks but also by the flood of automobile companies (GM most notably) working hard to pivot to the electric vehicle market. In the past week the stock has rallied, but not impressively, and it’s certainly possible the stock could fall further. Still, I’m holding long-term, because not only does Tesla have a huge lead in the EV market (having achieved top market share without advertising), but the company’s future will involve much more than manufacturing cars. Already, Tesla is making great inroads in the electric utility market—a bigger market than cars. And last week a Morgan Stanley report pointed to the great synergies possible between autonomous cars—which will need a ton of real-time data to operate, and SpaceX’s Starlink satellite network (consisting of thousands of low-altitude satellites working in conjunction with ground stations). HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, has the best-looking chart of all the stocks in my marijuana portfolio; it’s very close to punching out to a new high! But with the rest of the sector looking relatively weak (especially the Canadian stocks), such an event is rather unlikely. Still, as the market leader in Florida and one of the few companies in the industry to be posting regular profits, Trulieve’s long-term prospects are great. HOLD.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, bottomed before most growth stocks and has been impressively strong over the last two weeks. In last week’s update Mike wrote, “UBER has continued its up-and-down ways, though lately that’s been a good thing, as shares found support twice near the 50 area and have pushed back nicely higher since. Part of the reason may have been some intriguing tidbits from an investor conference this week: Management reiterated that it expects to be EBITDA positive in the second half of the year, which is obviously a good thing; Rides bookings were up 15% month-over-month in February in the U.S. and Canada, with the first week of March showing a 12% bump from February (!); and just as important, the firm has seen no slowdown in its Delivery business despite easing lockdowns, with that business still growing 150% year-over year! As we’ve written recently, we think UBER is an early stage situation (breakout last November) that is set to see business soar due to the combination of reopening trends and secular growth in the Delivery business. If you wanted to buy a small amount here, we wouldn’t argue with you, but officially we’ll stay on Hold and see how well the stock can hold its recent gains.” HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explore, has a chart that shows a quick round trip—to space and back in just two months, but last week it bounced off its 200-day moving average so we can say the bottom is in. And of course the future is still very bright. In his update last week, Carl wrote, “SPCE shares were relatively volatile this week but recovered nicely to close at 31 on Wednesday despite the news that Chamath Palihapitiya sold his entire personal stake in the company, and a previous announcement that the company’s next test flight will not take place until May 2021. If the next retest is successful, the company plans a second powered flight, a key step needed before revenue-generating commercial flights can begin. Shares have quadrupled since my recommendation and were up more than 100% in the first five weeks of 2021, when we recommended taking some profits, so we will hold the remaining shares for now.” HOLD.

The next Cabot Stock of the Week issue will be published on March 22, 2021.

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