March 7, 2022

With the market under pressure because of the war in Ukraine (not to mention lurking inflationary influences), defense continues to be important.
Today the portfolio is selling two stocks and downgrading two to hold.

But there’s always something to buy, and today it’s energy stocks, as I add our third energy stock to the portfolio.

Details inside.

New Recommendation

One of the many market truisms that prove useful at times is one that says you should buy when blood runs in the streets—even if it is your own. If it proves true this time, as blood runs in the streets of Ukraine, and all major market indexes are signaling a bear market, we will someday look back to today’s prices as bargains. In the meantime, we will stick to our system, and retain a reserve of cash until the market is acting healthier. For today’s stock, I’m going back to the very healthy energy sector, where we already have two stocks that are doing well. The stock was originally recommended by Mike Cintolo in Cabot Top Ten Trader and here are Mike’s latest thoughts.

Halliburton (HAL)
Investing in stocks of cyclical industries is always tricky, mainly because the biggest factors for their business (the price of or demand for the products they sell) are out of their control. In the energy industry, a big rise or fall in the price of oil can quickly impact the profits of explorers, which will filter down to changes in demand for drilling and completion products and technology.

But the good news is that, in general, the industry’s major cycles are fairly durable and foreseeable; after years of cost-cutting and reduced investment, it usually takes years (not just weeks or months) for the players in the industry to ramp up production sufficiently to take advantage of the new, higher prices. Thus, if you can get in early in the ramp and hold through some corrections and dead periods, you can usually do well.

In the current cycle, oil explorers have already had great runs, yet we remain bullish on the group due to the tremendous cash flow stories. What attracts us even more for new buying these days are oil service firms, which have just entered a new upcycle that should last for years. The best way to play that is Halliburton, which should see years of solid growth ahead.

The company has its hands in many fracking-related cookie jars, with a smorgasbord of products and (increasingly important) technology and software that help explorers evaluate and test reservoirs (including images to evaluate wellbore stability), construct wells (including optimizing production through all sorts of cementing and construction hardware), complete wells (including fracture modeling, completion fluids and reservoir monitoring) and maintain them. Its digital tools are catching on fast, too, including a cloud-based software subscription for exploration activities that allows clients to input all sorts of data and model and monitor it better than ever.

Basically, anything you need to pull oil or gas out of the ground, Halliburton can deliver, both here and overseas; in fact, international revenue makes up nearly 60% of the total. One thing that stood out in Q4 wasn’t just the overall solid results (more on that in a second) but the consistent upturn seen in all products and geographies. North America revenue rose 10% sequentially, while international revenue was up 11%, including a 16% quarter-over-quarter gain from Asia and the Middle East, 8% in Europe and 7% in Latin America. Moreover, in terms of segments, both completion and production revenue (up 10% sequentially) and drilling and evaluation (up 11%) lifted nicely.

Best of all, though, is what comes next. Quoting the CEO, ‘There is no doubt the much-anticipated multi-year upcycle is now underway,’ and ‘[looking] out to 2023, I don’t see 2023 as the endpoint (of the cycle) by any means; I think the road goes well beyond that.’ Yes, there are some near-term worries about Russian/European business, but big picture, these cycles tend to last a while as it takes time for the industry to catch up to demand after such a long dead period.

Altogether, Q4 saw revenues of $4.3 billion (the largest figure since pre-pandemic Q1 2020), up 32% from a year ago, while earnings of 36 cents per share were actually higher than that pre-pandemic level and double from a year ago. A solid hike to the dividend (now a 1.4% yield) and a bunch of debt retirement helped the cause, too. Analysts see earnings up 64% this year and another 32% next, which looks like a good bet even if oil prices come back down $20 or $30.

As for the stock, HAL peaked at 74 in 2014 and began a multi-year decline that bottomed at 5 during the March 2020 crash. It did recover from there to the mid 20s in early 2021, but that led to another basing process in which the stock made no progress for 11 months. But HAL’s character changed at the start of the year, with a very strong pre- and post-earnings advance, a brief rest period, and now it’s near new highs again.”

Tim’s note: Trends frequently last longer and go further than originally expected, and my bet in adding a third energy stock to our portfolio is that this strong trend for energy stocks could last much longer than most people expect today.

Current Recommendations and Changes

Current Recommendations

Officially, the broad market is now in a downtrend, so a defensive posture is warranted. For us that means moving to more energy stocks, like today’s recommendation. It means holding more cash; we’re selling two stocks today. And it means leaning toward more lower-risk stocks like undervalued stocks and big-dividend payers. Details below.

Changes Since Last Week’s Update
Bristol-Myers Squibb Company (BMY) to Hold
Stifel Financial (SF) to Sell
Verano Holdings (VRNOF) to Sell
Visa (V) to Hold

Arista Networks (ANET), previously recommended by Mike Cintolo in Cabot Growth Investor, broke through support at 120 when the invasion began, but it quickly bounced with the market and thus is still viable. In his update last Thursday, Mike wrote, “Arista continues to do its best to hang in there—and as long as it does, we’re happy to hold on and give the stock a chance. There’s been nothing new from the company since the quarterly report a couple of weeks back, though one thing from the earnings presentation caught our eye: Arista’s market share in 100G ports shipped lifted to 31.4% in Q3 of last year, up four percentage points from just three quarters prior (it’s too early for industry-wide Q4 numbers), and that trend is likely to continue and to broaden to newer 400G offerings given the company’s top-notch product line. (Maybe that’s why one big investment house just upped its target and offered bullish words.) Still, at day’s end, we own the stock and not the company; a drop below the low 110s or so (near last week’s nadir) would likely force us out of some or all of our position, but at this point, we’re OK hanging on.” HOLD

Bristol-Myers Squibb Company (BMY), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Growth/Income Portfolio, continues to climb! In fact, it’s just regained the 69.75 level where it peaked last August—which to the technician in me means the stock may pause there for a while and thus partial profits could be taken now. But Bruce (who was on vacation last week) is in for the long haul, with a target of 78, so I’ll stick with it, but I will downgrade it to hold, recognizing the potential for a pause here. HOLD

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, released its fourth-quarter results after the market close last Thursday. Before the event, in his weekly update, Tom wrote, “Yeah, the stock has been floundering lately along with the tech sector. It’s down more than 14% YTD. But there is a catalyst in the offing. Broadcom reports earnings tomorrow. The stock got a huge boost after the last earnings report and there is no reason why this one should not be stellar as well.” And Tom seems to have been right, as the revenues were $7.7 billion, up 16% from the year before and EPS was $8.39, up 27% from the year before (both metrics beating analysts’ estimates slightly) and the stock climbed higher on Friday on big volume. HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, provides a 3.5% yield with little drama, and the chart looks great, with the main trend slowly and steadily up. In his update last week, Tom wrote, “This defensive infrastructure partnership just continues to do its thing regardless of the market trends. It remains near the high and on a long-term slow and bouncy uptrend. Reliable and growing income and solid dividends never really go out of style. I expect more of the same going forward: slow and reliable appreciation and income. (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! Bruce’s price target is 66 and you get a nice 2.7% dividend while you wait. HOLD

Devon Energy (DVN), originally recommended by Mike Cintolo in Cabot Growth Investor, continues to hit record highs as the geopolitical situation drives oil prices higher. In his update on Thursday, Mike wrote, “DVN continues to look fine, hanging near new-high ground, and nothing has changed with the tremendous cash flow story here. That said, we have our antennae up, at least in the short term. Why? Well, when we bought DVN in the first part of last year, oil stocks were generally hated (or viewed as ‘only’ economic reopening plays), and few predicted anything amazing for energy prices. Today, of course, oil is at 13-year highs (up around $110), and energy stocks are basically the strongest group in the market—and DVN is one of the strongest in the sector. Plus, the last real breakout for the stock came in September, so it’s not early in the intermediate-term move, and when it comes to portfolio management, DVN has grown to be a huge position (18% or so of the Model Portfolio). With all of that said, it certainly doesn’t seem like investors are discounting ever-higher oil prices (we’re not valuation-based investors, but the stock is trading just above nine times anticipated cash flow assuming just $75 oil), and we haven’t seen any real abnormal action (on the upside or downside) in DVN or its peers. In total, if we see a change in character, we’ll probably book partial profits, but at this point we’ll continue to go with the evidence—with DVN and the group acting well, we’re hanging on, and we’re OK buying a small amount if we see modest dips (two or three points) from here.” BUY

Harley-Davidson (HOG), originally recommended by Carl Delfeld in Cabot Explorer and featured here two weeks ago, 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. In his update last week, Carl wrote, “Milwaukee-based Harley has renewed its focus on the U.S. market. Harley-Davidson’s revenue jumped 40% year over year to $1 billion, driven by a 39% rise in motorcycle shipments.” 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. And last Wednesday the stock broke out to a record high! Bruce’s price target is 46 and you get a very nice 3.1% dividend yield. BUY

Pioneer Natural Resources (PXD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a record high last Wednesday and has pulled back minimally since. 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 here last week, 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. Fourth-quarter results will be released before the market opens on Thursday, March 10, but I don’t see much risk in buying now, as the stock, which only came public in October, has fallen from 58 to 23 and is building a base right here. 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 today it’s back down in its trading range between 55 and 65, where the stock has spent much of the past year. Bruce’s price target is 75. BUY

Stifel Financial (SF), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here just three weeks ago after it broke out to new highs, has seen that breakout fail and the stock fall through all its moving averages, dealing us a quick loss. Thus, the only course, given that the stock was bought for its momentum, is to sell now that its momentum has disappeared. SELL

TaskUs (TASK), originally recommended by Tyler Laundon in Cabot Early Opportunities, and featured here a month ago, released its fourth-quarter report after the market close last Monday, and the results were great. Revenues grew 63% from the prior year to $227 million, while EPS soared 240% from the prior year to $0.34. The stock bounced up 15% the next day (classic small-cap stock action) and it’s since pulled back normally. TASK 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. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is trading right on its uptrending 200-day moving average, neither overinflated nor depressed—and that’s fine with me. The company’s Berlin Gigafactory received conditional approval to operate last week so the company is now delivering locally made cars to the hungry European market instead of importing them. HOLD

U.S. Bancorp (USB), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, remains in the trading range between 55 and 60 that’s constrained it since May. In his update last week, Tom wrote, “This regional bank stock has been indecisively bouncing around. It took a hit in the recent down market and is attempting a recovery from there. But I think the environment should be very supportive this year as the economy still grows above trend and interest rates likely rise. It’s tough to say what the stock will do in the near term, but I expect it to be higher six months from now.” BUY

Veeco Instruments (VECO), originally recommended by Carl Delfeld in Cabot Explorer, was hitting new highs in early January and now it’s back in the middle of its uptrending channel, looking fine. In his update last week, Carl wrote, “VECO shares advanced from 26 to 28 in a tough week all around. Veeco recently reported quarterly earnings of $0.43 per share, an increase of 19.4%. Revenue for 2021 was $583 million, 28% growth over 2020, driven by semiconductor and data storage. Veeco makes the equipment and technology essential for the chip fabrication game, a business with technological and high capital barriers to entry which leads to high margins and return on equity. Veeco is a high-quality idea but I moved this stock to a hold last week until markets settle down.” HOLD

Verano Holdings (VRNOF), recommended by yours truly in Cabot SX Cannabis Advisor, bottomed with the entire cannabis sector late last year, and had been building a base at 10 since October. But it slipped below that base last week as industry leader Curaleaf (CURLF) reported fourth-quarter results that saw revenue growth slip to 39% YoY. CURLF sank to new lows after the report and with the whole sector weakening, and VRNOF’s base failing, I’m going to cut the loss here. VRNOF is the portfolio’s biggest loser and I can no longer justify holding it in this portfolio. SELL

Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has been hit hard by fears that the war in Ukraine and the closing of business in Russia will hurt profits. In his update last week, Tom wrote, “The payment processing company has taken it on the chin amidst the Russia/Ukraine situation. The next leg of the pandemic recovery was well underway as international business is strongly recovering. But the crisis has cast doubt on the viability of that international recovery. Everybody sours on anything international when geopolitical tensions rise. The situation will probably get resolved without much damage to the global economy. But I will watch closely as events unfold. The stock will be downgraded to a HOLD amidst the current high level of geopolitical uncertainty.” I’ll do the same, noting that there is support for the stock at 190, but if it falls through that level, I will likely sell. HOLD

The next Cabot Stock of the Week issue will be published on March 14, 2022.