March 28, 2022

With the market continuing to improve, and chip stocks increasingly in demand, we add another chip stock (a very established one) to the portfolio today.
But we’re selling one stock too (VECO), taking profits and looking to reinvest them in something with greater potential.

Details inside.

New Recommendation

With the market looking increasingly healthy and investors getting increasingly bullish, I’m going to continue to move the portfolio back toward a fully invested position—while keeping it diversified. Today’s selection is a well-known technology company whose stock was one of the biggest winners in the dot-com bubble of 2000; in fact, the stock was so overvalued that it’s still trading below its peak price of that year! But now it’s a great value and it pays a fat dividend. The stock was recently recommended by Tom Hutchinson of Cabot Dividend Investor and here are Tom’s latest thoughts.

Intel (INTC)
Intel is an icon of the technology revolution. The company makes chips or processors that are essentially the brains of the computer. It is one of the largest semiconductor companies in the world, with $79 billion in annual revenue, and holds by far the largest market share of the PC and server processor markets.

But lately is has been getting its butt kicked by the competition, mainly Advanced Micro Devices (AMD) and Nvidia (NVDA). These companies are grabbing market share and have torrid earnings growth. Over the last five years AMD has soared 773% and NVDA is up 936%.

But Intel’s stock performance has been abysmal. Look at the average annual returns over the past five-, three- and one-year periods for INTC compared to the semiconductor industry and the S&P 500.

What happened? To make a long story short, Intel missed the boat on smartphone chips. Intel is king of the PC (personal computer) chip market, but that market is stagnating. The growth has been in mobile devices and smartphones. Competitors cornered that market and Intel was never able to break in. And there’s been more bad news lately.

Last fall, Intel announced that production problems would delay the rollout of its next generation of chips due problems in the manufacturing process, giving an opportunity to the competition. INTC plunged 10% on the news. Then, in February, Intel reduced 2022 earnings guidance to $3.50 per share from $5.47 in 2021, a decline of 36%. The market didn’t like that either.

The stock is currently floundering near its lowest level in more than four years. That’s the bad news. And it’s bad. But the stock is dirt cheap and there is a huge opportunity ahead.

A Renewed Mission
The reason for the dip in this year’s earnings is because Intel will focus on the future by investing a record $27 billion on new products, compared to capital expenditures of $18.7 billion last year and $14.3 billion in 2021. Intel is rolling up its sleeves and taking on the competition. The company had been the best in the business on such investments and still has a lot of mojo left. There are some hugely promising growth opportunities.

One opportunity is in gaming. AMD’s earnings have been primarily driven by gaming and crypto mining. The gaming market is currently dominated by AMD, but Intel is already making serious inroads. It also has next-generation chips coming in 2023 and 2024 that are superior to AMD’s next generation.

There is also opportunity in the data center CPU market that is forecast to grow to $21 billion by 2026. Nvidia currently dominates with an 80% market share, but Intel has new technology coming in the next few years that is supposedly superior to Nvidia’s.

Intel is also planning to aggressively expand its foundry business, where chips are manufactured. There is a big push in this country to produce more chips and reduce overseas reliance. Intel recently made a $5.4 billion acquisition of foundry company Tower Semiconductor that should close around the end of this year.

The stock is cheap. It sells at valuations well below the industry, the overall market, and its five-year average. It also appears to have bottomed. It had been bouncing around in the high 40s for several months but has broken out into the 50s recently as semiconductor stocks have rallied. This is a great longer-term opportunity to buy an industry leader at a beaten down price ahead of what is likely to be a much better five years going forward. And now it looks promising in the short term as well.

Current Recommendations and Changes

Current Recommendations

The addition of INTC brings the portfolio to its full complement of 20 stocks. Energy stocks remain strong, chip stocks are hot and TSLA gapped up this morning. But we’re selling VECO today (following Carl Delfeld’s lead), getting out while the getting’s good, and thus reducing the portfolio to 19 stocks once again.

Details below.

Changes Since Last Week’s Update
Arista Networks (ANET) to Buy
Sensata Technologies (ST) to Hold
Veeco Instruments (VECO) to Sell

Arista Networks (ANET), previously recommended by Mike Cintolo in Cabot Growth Investor, has had a strong two weeks and is now nearing its December high of 148. In his update last Thursday, Mike wrote, “ANET has been quiet on the news front since its earnings report about five weeks ago, but all indications are that the massive spending spree from some of the Cloud Titans (like Meta Platforms) is full speed ahead despite the macroeconomic worries that have popped up of late. There’s no question that those clients will be the main drivers of business in the quarters ahead, but it’s not like Arista is wholly dependent on them, either—Arista’s smaller, specialty cloud segment saw growth accelerate last year, while its small campus segment (just $200 million in revenue last year) should get much larger over time, starting with a doubling in business this year alone. (Impressively, half of purchases in that area came from entirely new customers to Arista, which bodes well down the road.) Combined with the stock’s normal correction and consolidation thus far (12 weeks long, 27% deep, held above the 40-week line the entire time), ANET would definitely be on our watch list if we didn’t already own it. Thus, if you have some, sit tight, but if not, we’re OK starting a position around here—we’re placing the stock on Buy.” I’ll do the same. BUY

Bristol Myers Squibb Company (BMY), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Growth/Income Portfolio, remains one of the strongest stocks in the portfolio—and Bruce says it’s still undervalued. In his update last week, he wrote, “The FDA approved a new Bristol treatment for cancer, providing some encouragement about the value of the company’s new product pipeline. Bristol said that the new treatment, called Opdualag, is the first in a new class of cancer treatments, which, when paired with the existing Opdivo treatments, could generate as much as $4 billion in revenues in 2029.

BMY shares have gained 13% year-to-date. The shares have about 10% upside to our 78 price target. Valuation remains low at 9.0x estimated 2022 earnings, compared to 11x or better for its major peer companies. The stock’s 8.5x EV/EBITDA multiple is similarly cheap, compared to 9-10x or better for peers.

We believe the earning power, low valuation and 3.1% dividend yield that is well-covered by enormous free cash flow make a compelling story.” HOLD

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, broke out above its February high of 615 last week and is now aiming for its December high of 678. In his update last week, Tom wrote, “Business is booming as Broadcom benefits from the 5G rollout and should also benefit from increased internet usage further out. Although still well off the high, AVGO is back over 600 per share. I believe the selling in the tech sector is overdone. When the sector recovers AVGO should really move up.” HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, provides a 3.5% yield and the stock keeps going up (slowly). In his update last week, Tom wrote, “Quietly, this infrastructure partnership has broken out to a new all-time high while the world goes to hell in a handbasket. Safety is back in vogue amidst the uncertainty. Utilities are the third best performing sector of the market YTD next to energy and financials. Brookfield has incredibly reliable crucial assets that bring in steady revenues no matter what, as well as an earnings boost for the new acquisition in energy infrastructure. (This security generates a K1 form at tax time).” HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, has been up and down since our July recommendation but has made little net progress yet, which just means it’s a better buy now. In his update last week, Bruce wrote, “CSCO is facing revenue pressure as customers migrate to the cloud and thus need less of Cisco’s equipment and one-stop-shop services. Cisco’s prospects are starting to improve under a relatively new CEO, who is shifting Cisco toward a software and subscription model and is rolling out new products, helped by its strong reputation and entrenched position within its customers’ infrastructure. CSCO shares have 17% upside to our 66 price target. The dividend yield is an attractive 2.7%.” HOLD

Devon Energy (DVN), originally recommended by Mike Cintolo in Cabot Growth Investor, hit another new high last week! In his update last Thursday, Mike wrote, “Oil stocks remain strong, albeit very choppy and news-driven, with overnight comings and goings on the global scene pushing oil prices and energy stocks up and down. Still, beyond the daily gyrations is the simple fact that energy prices are very elevated, and leading producers like Devon should see their payouts grow from the already-huge levels of Q3 and Q4. Indeed, so far in the first quarter, oil has averaged $93-ish compared to around $77 in Q4, and while natural gas prices have been down a bit from the prior quarter ($4.45 vs. $4.80), some back-of-the-envelope math certainly implies the next payout should be even higher than Q4’s $1 per share—and, of course, that says nothing about likely additional share buybacks and debt reduction on top of that. (At $95 oil and $4 gas, Devon should crank out around $2 of free cash flow per quarter.) Of course, all of that price information is well known; what will drive the stock is perception of the future, and if there are some steps toward peace in Europe, it’s likely that the entire energy complex will pull in. Put it all together and we continue to think that, over time, the energy bull market has longer to run—most leaders in the group like DVN are still trading at free cash flow yields of 11%-plus even assuming a $25 drop in oil prices—but near term, further wobbles are possible based on the news of the day. If we do see a calm, controlled pullback, we could restore our Buy rating, but right now we’re comfortable having taken some lucrative partial profits two weeks ago and holding our remaining shares.” HOLD

Ford Motor (F), originally recommended by Carl Delfeld in Cabot Explorer and featured here three weeks ago, is still a bargain, trading 37% off its January high. In his update last week, Carl wrote, “The company’s announcement that it’s splitting the company into two, with Ford Model e in charge of its EV business and Ford Blue handling its legacy combustion engine business, was eclipsed this week by Volkswagen’s announcement of $7.1 billion investment in EV manufacturing in America. Ford targets $50 billion in EV investment through 2026, and as part of its push, Ford deepened its existing partnership with Volkswagen. Ford said it would introduce three new electric passenger vehicles and four new electric commercial vehicles in Europe by 2024, adding it plans to sell more than 600,000 EVs in the region by 2026.” BUY

GlobalFoundries (GFS), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, is a huge player in making chips for firms that dominate the smart mobile device market. In his update last week, Mike wrote, “Chip stocks can come and go relatively quickly, as we saw with Ambarella late last year, but GlobalFoundries has the makings of a winner. The firm is a chip foundry, which normally doesn’t excite us too much; these businesses are often down-the-food-chain stories, with demand drying up quickly if their clients cut back. But there are a few reasons why that won’t be the case here: First, of course, are industry conditions, with a worldwide chip shortage likely to persist for at least another few quarters. Second is the company itself, which has focused much of its efforts outside of commoditized areas and instead in growth-y segments like smartphones (it has a dominant share here), communications infrastructure, Internet of Things and auto applications (which should be huge over time). And third, because of the first two items, GlobalFoundries is inking a bunch of long-term contracts with big players that often include pre-payments, allowing the company to expand capacity in a big way to meet demand that’s sure to come; it signed more than 30 long-term deals last year, including one with BMW and an expanded agreement with Advanced Micro Devices in Q4. Long story short, GlobalFoundries likely has three to four years of solid sales and cash flow growth ahead, with more in store afterwards if management makes the right moves. As for the stock, it etched higher lows during the correction and then went vertical on big volume to new highs last week.” And it hit another new high on Friday! BUY

Halliburton (HAL), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here three weeks ago, closed at a record high last Friday and has pulled back minimally today. If you haven’t bought yet, I recommend waiting for a deeper pullback. BUY

Harley-Davidson (HOG), originally recommended by Carl Delfeld in Cabot Explorer, has a great American brand and is working on building another with its all-electric LiveWire motorcycle division, which will spin off into a SPAC later this year. The stock has pulled back normally over the past month and looks like a good buy here. BUY

Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, was spun off from Merck in June 2021 and is a member of the S&P 500—but undervalued by the market according to Bruce. In his update last week, Bruce wrote, “OGN shares rebounded 9% in the past week, recovering much of their recent sell-off. The shares have about 30% upside to our 46 price target. The shares continue to trade at a remarkably low valuation while offering an attractive 3.2% dividend yield.” BUY

Pioneer Natural Resources (PXD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, closed at a record high last Friday and is down a little today. As noted previously, the sector is strong now, but that won’t last forever, so we’ll just ride the trend until it ends. If you haven’t bought, try to get in on a pullback. BUY

Portillo’s (PTLO), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured two weeks ago, is a Chicago-based restaurant chain that came public last October and is planning on using the proceeds from that offering to expand from its current nine states to many more. After peaking at 57 in November, the stock corrected all the way down to 21, and as it recovers from that low, it looks like a good investment. BUY

Sensata Technologies (ST), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, was at a record high of 65 at the start of the year, but it’s down 23% since then and thus a better value. In his update last week, Bruce noted that ST shares have about 42% upside to his 75 price target, and that’s great potential. But right now, the stock is this portfolio’s biggest loser, and the stock is going the wrong way! I have great respect for Bruce’s methodology, but I also know that sometimes these stocks take a long time to work out—which is why value-centric portfolios tend to have more stocks than growth-centric portfolios. If our portfolio were full and I needed to make room for a new recommendation, ST might get the axe today. But the sale of VECO means we still have room to hold this laggard—and give it at least one more week to get going in the right direction. For now I’ll simply downgrade it to Hold. HOLD

TaskUs (TASK), originally recommended by Tyler Laundon in Cabot Early Opportunities, provides customer support and customer experience (CX) services to “new economy” companies like Zoom (ZM), Uber (UBER), Netflix (NFLX), Coinbase (COIN), DoorDash (DASH) and Meta Platform’s (FB) Instagram, among others. The stock came public last June, peaked at 85 in September, pulled back to the 30 area in January and February (where we recommended it) and then gapped up after the company’s fourth-quarter report was released. There should be plenty of upside ahead. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was very strong over the past two weeks and then gapped up this morning on the news that Elon Musk is looking for shareholder approval to split the stock. Tesla’s previous stock split, in August 2020, saw the stock soar more than 30% before the fact—and then spend three months after the split had been effected digesting the advance and building a base for the next leg up. HOLD

U.S. Bancorp (USB), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, remains in its trading range between 55 and 60. In Tom’s update last week, he wrote, “Interest rates pulled back for a while after the Russian invasion and bank stocks sold down. But despite the apparently short-lived hysteria, the main pressure for interest rates remains higher amidst persistent high inflation. The 10-year rate has not only since recovered but shot to a new recent high at 2.37%. Bank stocks and USB are also recovering. It’s worth being patient through the current volatility because a bank-friendly environment should reemerge in a relatively short time.” BUY

Veeco Instruments (VECO), originally recommended by Carl Delfeld in Cabot Explorer, has done well for the portfolio in the time we’ve owned it, and it remains on a slow and steady uptrend, but Carl says it’s time to move on—and I agree. In his update last week, he wrote, “Despite the company’s strong balance sheet and steady growth, I‘m moving this to a sell to make room for new ideas with more upside potential.” I mentioned the possibility of taking profits in this stock just last week, and one reason for that thought was the fact that while this stock has been healthy over the past few years, over the longer term (the past 25 years), it’s made no progress. The chip business is notoriously cyclical. SELL

Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, was hit hard by panic selling early in the Ukraine war, but it’s recovered that loss over the past three weeks, so all is well. In his update last week, Tom wrote, “Visa is back. V crashed after the initial shock of the Russian invasion as investors soured on anything international, but has been moving higher recently as investors recognize V as a good place to bottom fish in the panic phase of the crisis. I expect business to remain strongly growing this year and the stock should take off again if this crisis fades. It’s up sharply off the bottom.” HOLD

The next Cabot Stock of the Week issue will be published on April 4, 2022.