March 22, 2021

The market remains in an uptrend and, while the divergences and rotation of recent weeks haven’t been totally erased, our diversified portfolio is doing well and Cabot analysts continue to find attractive investment opportunities.

In our current portfolio, the only change this week is an upgrade of Sea (SE) to Buy.

As for today’s new recommendation, it’s in an out-of-favor sector that has the potential to deliver real upside surprises as the global economy emerges from COVID times.

Details inside.

Cabot Stock of the Week 340

The broad market continues to send mixed messages. While leading growth stocks have been hit hard (and some have rebounded), the major indexes remain in uptrends and cyclical stocks and “reopening” stocks have attracted new buyers. Bottom line: it’s still a bull market, but selectivity is important as ever—as is diversification, perhaps the single biggest conviction of this advisory. Thus, while I’m happy to chase a number of hot stocks, like last week’s DraftKings, I’m also happy to be able to recommend some truly contrary value stocks, like this week’s recommendation, Barrick Gold. The stock was originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and here are Bruce’s latest thoughts.

Barrick Gold (GOLD)
Barrick is one of the world’s largest and highest quality producers of gold. Based in Toronto, Canada, the company has mining operations around the world, with about 50% of production in North America, 32% in Africa and the Middle East and 18% in Latin America and Asia Pacific. The company also has smaller copper mining operations. Barrick’s market capitalization is about $37 billion.

This stock is not only out of favor (a classic contrarian trait), but is also not infrequently looked upon with doubt, disdain and discredit. The entire gold mining industry isn’t immune to such views, either. But the gold mining industry, and certainly Barrick, has lost the loose-spending and often murky culture of decades ago. After a long struggle with disappointing profitability and low returns on capital, today’s gold mining industry is one of restraint, transparency and financial discipline.

Barrick’s chairman is a former Goldman Sachs president, hardly someone who would wantonly waste shareholder money. Since taking the chairman’s seat in 2014, his signature achievement over the subsequent 4½ years was slashing costs and paying down Barrick’s entire $13 billion of net debt.

Barrick’s shares surged in 2019 and early 2020, lifted by the combination of rising gold prices and the arrival of a highly capable new CEO, Mark Bristow, in January 2019. Bristow joined Barrick when it acquired Randgold Resources, a major South African mining company that he founded. He is highly regarded for his ability to manage portfolios of gold mines, reduce costs and navigate the complicated process of operating mines in less-developed countries that yearn for the revenues that gold mines (which obviously can’t be relocated) generate. Impressively, in his first year at Barrick, Bristow created a joint venture that combined Barrick’s and Newmont Mining’s Nevada gold mines into a single world-class operation, generating large cost and productivity improvements.

Since their mid-2020 peak at around $2,000/ounce, gold prices have slipped about 15% to $1,730/ounce. Barrick’s shares have slid over 30%—not surprising as mining company stocks magnify the moves in the underlying commodity. With the fall-off in the share price, Barrick shares now have considerable appeal.

Our thesis is based on two points. First, that Barrick will continue to generate strong free cash flow at current gold prices, continue to improve its operating performance and return much of that free cash flow to investors while making minor but sensible acquisitions. Demonstrating its commitment, the company will pay $0.42/share in special distributions this year, in addition to its regular $0.09/share quarterly dividend. Barrick’s balance sheet remains solid, with its $5.2 billion in debt fully offset by its cash balance.

Second, that Barrick shares offer optionality; if the enormous fiscal stimulus, rising taxes and heavy central bank bond-buying produces stagflation and low interest rates, then the price of gold will move upward and lift Barrick’s shares with it. Given their attractive valuation, the shares don’t need this second (optionality) point to work—but it does offer extra upside.

Major risks include the possibility of a decline in gold prices, production problems at its mines, making a major acquisition and/or an expropriation of one or more of its mines. At just under 21, Barrick shares trade at a sizeable discount to our value estimate of 27, based on 7.5x estimated 2021 EBITDA and on a modest premium to its $25/share net asset value. The combined dividends this year will produce a 3.7% yield. Although the company may not pay a special dividend next year, it could raise its recurring dividend to provide an above-market yield. We think Barrick has a much better future than the market is assuming.

Current Recommendations

With five of our stocks hitting new highs last week and none falling apart, trends in general for the portfolio remain good. There are no sells this week, and the only change is the upgrade of Sea (SE) to Buy. 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. Details below.

Changes
Sea, Ltd. (SE) to Buy

APi Group (APG), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here two weeks ago, hit a record high last Thursday and has pulled back normally since. 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, is one of the high-profile technology growth stocks that plunged below its 50-day moving average three weeks ago (bottoming on the day earnings were released), but the stock has since rallied, coming close to a new high last week so it’s definitely still in an uptrend. In his update last week, Tom wrote, “The stock took a hit during the tech selloff but has come roaring back in the past week. It’s up 13.5% in the last six trading days and appears set to regain all the recent losses in short order. The company is rock solid with strong earnings and great prospects in the quarters ahead. It looks like the tech correction is over and there shouldn’t be anything standing in its way.” BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is a Steady Eddie, going nowhere fast. In Tom’s latest update, he wrote, “Yeah, this infrastructure partnership hasn’t really gone anywhere for several months. But some context is needed. It has held its own in this cyclical stock run-up while defensive stocks have been out of style and floundering. The market will likely change stripes in a way that is friendlier to BIP. It should have a great year, with growing earnings as infrastructure becomes a more popular investment.” BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, is not a popular stock today—the stock has made no progress since late 2018—but Bruce says there’s value here. In his latest update, he wrote, “While the near-term outlook is clouded by pandemic-related stay-at-home restrictions, secular trends away from sugary sodas, high exposure to foreign currencies and always-aggressive competition, Coca-Cola’s longer-term picture looks bright. Consensus estimates point to 10% revenue and earnings per share growth in 2021, and Coke will likely continue to generate robust free cash flow in 2021. The stock has about 25% upside to our 64 price target. While the valuation is not statistically cheap, at 23.8x estimated 2021 earnings of $2.15 (unchanged in the past week) and 21.9x estimated 2022 earnings of $2.33 (up a cent), the shares are undervalued while also offering an attractive 3.3% dividend yield.” BUY.

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, is strong; it touched a new high this morning! In last week’s update, Mike wrote, “The fact that the stock is still near its peaks after a good-sized convertible (dilutive) bond offering and after the market’s wobbles this week is good to see. Meanwhile, more industry reports bode very well: New Jersey (the biggest gambling market in the U.S.) sportsbooks saw a 50% year-on-year leap in activity in February, while one analyst noted that most users want to stick with one betting platform, which should help the leaders in the field like DraftKings. Expect more volatility, but we’re OK buying a half-sized position (for us, that’s 5% of the Model Portfolio) in DKNG if you’re not yet in.” BUY.

Five Below (FIVE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a new high last Thursday after reporting earnings, but short-term traders then took profits. Long term, however, all looks well. In his update last Thursday in Cabot Growth Investor, Mike wrote, “Five reported a fine quarter last night, though that didn’t stop it from losing ground today (thus is life in a weak market). The Q4 numbers were great (sales up 25%, earnings up 12%, same store sales up 13.8%), but far more impressive was guidance and management’s update—about halfway through this quarter, same-store sales were up 12.8%, leading management to predict a booming Q1 (sales up 50%, earnings up 35%-plus), and the top brass said they’ve already opened 34 new stores this quarter with another 26 on the way, all of which will have Five Beyond (items priced up to $10) sections. Of course, some of the Q1 growth could come from the latest round of stimulus checks, but even so, analysts are hiking estimates and the larger, longer-term growth path is clearly back on track. Back to the stock, it reversed lower as investors took the opportunity to sell into strength, which isn’t unusual in a bad market, but still needs to be respected. Right here, we’re OK picking up a few shares if you don’t own any, though we’d like to see it hold up in and around here.” So far, it’s held up just fine. BUY.

General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, hit another new high last Thursday and has pulled back minimally since. In his update last week, Bruce wrote, “General Motors is estimated to produce about 14% higher revenues in 2021, but earnings are expected to increase only about 6% (to about $5.21) due to near-term headwinds from tight semiconductor chip supplies. GM Financial will likely continue to be a sizeable profit generator. Through its majority-owned subsidiary Cruise, GM announced a deal to acquire Voyage. This small company is developing self-driving cars, with an initial emphasis on retirement communities. We see this deal as essentially a research-and-development expense. If Voyage has technology that works in the relatively controlled environments of a retirement community, it may have applicability for uncontrolled urban streets. GM also said that it is building some trucks without semiconductor-driven fuel management modules, which will reduce the vehicles’ mileage by about 1 mile per gallon. Hopefully GM is pre-building these trucks so that the modules can be immediately added before hitting the showroom floors, or can be added after purchase, rather than selling trucks that would never get the upgrade. GM shares rose 5% in the past week, supported by the $1.9 trillion stimulus bill and improving Covid data. The shares have 8% upside to our 62 price target. On a P/E basis, the shares trade at 9.2x 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 growth prospects remain 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. Fourth quarter results will be reported on Wednesday. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, sold off six weeks ago after a disappointing quarterly report but has been climbing steadily higher since then. In his update last week, Bruce wrote, “Molson is estimated to produce about 5% revenue growth and a 1% decline in earnings in 2021. Profit growth is projected to increase to a 5-6% rate in future years. Weakness this year is closely related to the sluggish reopening of the European economies, along with higher commodity and marketing costs. The company will likely reinstate its dividend later this year, which could provide a 2.9% yield. TAP shares have about 22% upside to our 59 price target. Earnings estimates remain stabilized with no deterioration again this past week. TAP shares trade at 12.4x estimated 2021 earnings of $3.88 (up a cent this past week). 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 now been trading below its 50-day moving average for a month, but Tom says that’s temporary. In his update last week, he wrote, “The recent market bias toward cyclical stocks has been so extreme that not only did the utility sector get beaten up, but the mania even took down NEE, which had previously been immune to struggles in the sector. The natural state of this alternative energy utility is to be an up-trending juggernaut. This recent diversion from the mean should be temporary. That’s why NEE was upgraded to a BUY three weeks ago. The stock bounced back from the recent lows quickly in past weeks. The market could undo this latest aberration quickly at some point. A little patience should pay off.” BUY.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, was hit hard by the growth stock selloff a few weeks ago and while it’s recovered some of that loss, the stock still sits just below its 50-day moving average—which is not great. In his update last Thursday, Mike wrote, “PINS had a bad day today, as did most of the “old” winners from the past few months. It’s not pleasant, but it doesn’t really change the overall look of the chart—PINS rallied from 60 to 75, right back into its 50-day line (a solid-not-spectacular bounce), and is now backing off. Near-term, the stock still has issues, hence our Hold rating (and why we’ve booked partial profits). Longer term, the odds still favor this correction morphing into a new launching pad that leads to another leg up.” HOLD.

Progyny (PGNY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is a fertility benefits provider that grew revenues 54% YoY in the latest quarter and is now generating regular earnings, too. The stock bottomed with other growth stocks a few weeks ago, but is now back above its uptrending 50-day moving average so all is well. I like this story. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, sold off with growth stocks a few weeks ago, rallied to its 50-day moving average last week, and has now sold off again—and Carl thinks this is a good buying opportunity! In his latest update, he wrote, “Shares have been under some pressure since reaching a 2021 high of 276 in mid-February, but this growth story is intact. 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 but with this sharp pullback, I’m moving this stock to a buy.” I’ll do the same. BUY.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been one of the worst-performing auto stocks of 2021, and there’s no surprise why—the stock was up sevenfold in 2020, so it needs a rest! 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. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, has the best-looking chart of all the stocks in my marijuana portfolio; in fact it’s the only one that was able to hit a new high last week! Still, I remain worried about the sector in general, because most of the stocks are much softer and I think they need a longer cooling-off period after last year’s big run. As for Trulieve, management last week announced the promotion of Eric Powers to Chief Legal Officer, and the appointments of Ronda Sheffield to Chief Human Resources Officer, Zachary Kobrin to General Counsel, and Aaron Lopez to Director Government. Beefing up the company’s legal, human resources and government affairs capabilities looks like a wise move given the challenges and opportunities of state-by-state expansion and eventual national legalization.” HOLD.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, looks fine, tracking its uptrending 50-day moving average. In last Thursday’s update Mike wrote, “UBER took a hit yesterday after saying it will treat U.K. drivers (more than 70,000 of them!) as employees, going along with a court ruling from a few weeks back, though today it reaffirmed that business continues to pick up, with March business trends stronger than February and January. (Peer Lyft also said last week was its best since the pandemic began.) We still believe UBER can make a nice move higher if/when the pressure comes off the market, but we’ll stick to our Hold rating as the stock continues to thrash around.” HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explore, has been our most volatile stock in recent months, blasting from 23 to 63 and then falling back to 24 where it bounced off its 200-day moving average—but long-term prospects remain bright. In his update last week, Carl wrote, “SPCE shares had a good week, gaining six points to 33, but are substantially down from their 2021-high five weeks ago. The news over the last few weeks has not been favorable, with the SPAC founder Chamath Palihapitiya selling his entire personal stake in Virgin Galactic, though he still owns 15.8 million shares via his special purpose acquisition company, Social Capital Hedosophia Holdings, which took SPCE stock public. The company is spending around $16 million per quarter and has over $660 million in cash, lessening concerns that the company’s next test flight will not take place until May. The stock still has a devoted following and shares have quadrupled since my recommendation last year. We have taken some profits several times so we will hold remaining shares for now.” HOLD.

The next Cabot Stock of the Week issue will be published on March 29, 2021.

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