May 10, 2021

The market’s main trend remains up and thus I continue to recommend that you be heavily invested in stocks that can help you meet your investing goals, all while remaining diversified to reduce risk.

However, it’s become increasingly difficult to hold on to growth stocks. Last week I dealt with that by recommending a low-risk income stock with decent growth potential, and this week I’m recommending a very cyclical stock in an industry that was recently deeply out of favor.

As for our current holdings, this week there are two sells and three downgrades to Hold.

Details inside.

Cabot Stock of the Week 347

With the Dow hitting another new high but the growth-focused Nasdaq Composite still unable to get above its February peak, we remain in a bull market that is challenging for growth investors; in fact, many recent great earnings reports have been met with selling instead of buying. So what’s a growth investor to do? As always, listen to the stocks. And when it comes to new buying, don’t be afraid to buy an old cheap dinosaur of a company if its stock has developed strong momentum. That’s what Mike Cintolo is doing in Cabot Top Ten Trader, and these are his latest thoughts on this week’s stock.

Schlumberger (SLB)
I’m a growth investor, which means I spend almost all of my research time looking for firms with potentially revolutionary new products or services that are changing the way we work or play. Over many years, that is where the big money is made, by riding a young, new outfit through its uptrend.

However, I’m also a student of the market and of history, and I know that every once in a while you come across a unique, major turnaround situation that’s likely to last for years—usually something taking place in an entire industry. Back in 2011/early 2012, that’s exactly what was going on with homebuilders—after six years of a bear phase, the industry had cut costs to the bone, so as the industry recovered, earnings (and the stocks) enjoyed excellent runs over the next couple of years.

Today, I’m seeing a broadly similar thing play out in the energy patch, and there’s an added kicker, too—more on that in a sec. An industry that’s been out of favor for years, forcing cutbacks and consolidation, and now, with super-loose fiscal and monetary policy, has returned to reasonable ($60 oil, $3 natural gas) energy prices, which is goosing profits for the leading players. Moreover, with explorers all favoring discipline (cash flow) over growth (higher output), the odds of a major hiccup (oversupply) are low.

The entire sector is looking bullish, I like Schlumberger, which is one of the granddaddies of the oil service sector, with operations in dozens of countries around the globe (the vast majority of its business is outside the U.S. at this point) that are just starting to pick up steam.

That’s not to say the company has completely stood still during the past couple of years. First, like everyone else, it’s cut costs to the bone, which should boost the bottom line in a big way; at a recent conference, the top brass said that cash flow would fully recover back to 2019’s levels even if revenues only came halfway back!

Moreover, as for the business, there has been a reorganization. Obviously, things like well construction and reservoir performance segments are still key drivers, with products and services that will benefit directly from higher drilling activities, not to mention the desire to get more out of existing wells (which should prove important as explorers are hesitant to expand production like mad)—but there’s also a distinct focus on technology offerings (its digital and integration segment is helping energy outfits adopt cloud, AI and automation offerings to help with well efficiencies), which is already one of the larger contributors to operating income. And the company is developing alternative energy systems (electrolyzers to produce hydrogen, carbon capture and storage systems, services to develop geothermal power projects, etc.) that will obviously see a big increase in demand over time.

But, for business and for the stock, there’s little doubt that the global energy exploration activity is what most investors are focused on. And there’s good news on that front: North American revenue increased 10% sequentially last quarter (adjusted for some divestitures), and while international revenues sagged for seasonal reasons, global rig counts and other factors have management bullish, thinking Schlumberger’s overseas area will see double digit growth starting in Q3 with things accelerating into 2022.

All in all, while the past few quarters have been horrid, analysts see the turnaround being underway. Earnings are expected to rise to $1.11 per share this year (up 63% from last year’s depressed level) and to $1.56 in 2022 (up 42%), both of which are likely to prove conservative in our view.

The stock is certainly acting like that will be the case. After being in the doghouse for the better part of 13 years (it peaked at 114 in 2007 and bottomed at 15 last October), SLB had a great run with the entire energy sector from November through February before having a very reasonable seven-week correction. But now SLB has resumed its upmove, surging both before and after its Q1 report to new highs last week, and this breakout is a great sign that this uptrend has further to run.

Current Recommendations

Big value stocks have been thriving in recent months, with the recommendations of Cabot Undervalued Stocks Advisor in particular doing very well. On the other hand, growth investing had been challenging, with numerous failed breakouts and selloffs following even good earnings reports. As always, my prescription is not to argue with the market but to listen to it, and this week, that means selling two of our stocks and downgrading three more to Hold. Details below.

Changes
Pinterest (PINS) to Sell
SelectQuote (SLQT) to Hold
Sonos (SONO) to Hold
Trulieve (TCNNF) to Hold
Uber (UBER) to Sell

Barrick Gold (GOLD), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, released a great quarterly report last week (I’ll review Bruce’s comments next week), and the stock has enjoyed three up days since, so it’s clear investors were impressed. In his update last week before the report, Bruce wrote, “Barrick shares have about 24% upside to our 27 price target. The stock trades at a sizeable discount to our value estimate of 27, based on 7.5x estimated 2021 EBITDA and at a modest premium to its $25/share net asset value. Commodity gold was essentially unchanged at $1,776 this past week. On its recurring $.09/quarter dividend, GOLD shares offer a reasonable 1.6% dividend yield.” BUY.

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, remains a bit soft, but our small loss is still tolerable, given the stock’s long-term potential. In his update last week, Tom wrote, “This tech titan has been a big disappointment so far in the portfolio. I think the issue is timing. It was added just ahead of the tech sector correction. But this is a stock that has returned 1,600% over the last 10 years. And the environment ahead with 5G and the likely proliferation of new technologies might be even better. It could bounce around for a while longer, but who cares? The longer-term performance should be great.” HOLD.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, dipped to its 50-day moving average last week but is now moving up again. In his update last week, Tom wrote, “The good news is that this infrastructure partnership continues to trend higher. The bad news is that the pace is painfully slow. BIP is at the same price it was in the beginning of February. It’s still not far from the all-time high and this year should be good to Brookfield. Earnings should get a nice boost from new assets coming online as well as a recovery in its transportation assets. Infrastructure should also be a popular subsector after the pandemic.” BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser for the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, is now working on a breakout above 55, the level that has acted as resistance three times since November, and Bruce is targeting 64. In his latest update, he wrote, “KO shares have about 18% upside to our 64 price target. While the valuation is not statistically cheap, at 24.9x estimated 2021 earnings of $2.18 (unchanged in the past week) and 23.0x estimated 2022 earnings of $2.36 (up a cent), the shares are undervalued while also offering an attractive 3.1% dividend yield.” BUY.

Columbia Care (CCHWF), originally recommended in Cabot Marijuana Investor by yours truly, pulled back a bit last week, but found support at 6, so I still think buying is fine here. In my update to readers last week, I noted that the sector is still gaining strength as it works to begin a new uptrend and that CCHWF has one of the best charts among the second-tier players (tiers based on revenue). Interestingly, the news this morning that Trulieve is acquiring Harvest Health & Recreation (HRVSF), which had $88 million in revenues in the latest quarter, reminds us that Columbia Care, which had $76 million, could also be an attractive acquisition target for one of the other three major multistate operators. BUY.

Five Below (FIVE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been trading at the 200 level for more than three months, setting up for a breakout but not delivering, testing investors’ patience but never giving them reason to sell. In his update last Thursday in Cabot Growth Investor, Mike wrote, “We could pretty much copy and paste our past handful of writeups for Five Below here, as nothing has really changed—the story remains the same, with increasing foot traffic and store openings leading to a big rebound in business this year, while the stock continues to hack around in the 180 to 205 area (and more recently, the 190 to 205 range). What’s been interesting is the strength in “turnaround” retailers of late; similar to FIVE, investors are anticipating a big earnings upmove this year, and we’re all for the sector strength, which helps. But eventually we think the money will flow back to sustainable growth stories, where Five Below outshines most of its peers. Given the environment, we’re open to anything—it’s always possible the stock has hit a wall in the 200 zone that will create a larger decline, and if shares dip much from here, we could switch to a Hold rating. But we remain optimistic the next major move is up, as FIVE has had many chances to give up the ghost but has been able to (mostly) resist the myriad air pockets out there. We’re continuing to hold on tightly to our shares, and if you don’t own any, we’re fine grabbing some shares around here.” BUY.

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has tested its 50-day moving average a couple of times in recent weeks, but remains above it today, heading for its April high of 64. And the reason now is clear; GM released a solid first quarter report last week. I’ll relay Bruce’s interpretation of the report next week, but suffice to say, the stock is a strong hold for now. HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Explorer, remains a long-term hold, as growth prospects remain great for the largest operator of hotels in China. The stock has been wedging higher in recent months, with upside resistance at 62 and a series of higher lows defining the lower edge of wedge, so eventually the stock should break through 62—and out to new high territory. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has been hot in recent days, thanks to an excellent first quarter report. In fact, shares are now above Bruce’s old price target of 59. Thus, selling and taking your nice profit is one option. However, I’ll wait until I see Bruce’s analysis, which I’ll relay next week. HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, remains a bit weak, riding its uptrending 200-day moving average. In his update last week, Tom wrote, “The stock has been bouncing around since early this year. And it has had rare subpar performance of late. But therein lies the opportunity. The stock is getting a little beaten up ahead of what should be a glorious time for renewable energy. According to the International Energy Agency (IEA), renewables will provide nearly one-third of the world’s electricity by 2025. NextEra is an established provider with a strong backlog of projects. NEE should again be loved by investors in the near future.” BUY.

Nvidia (NVDA), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here two weeks ago, bounced off its 50-day moving average last week and has resumed its uptrend. First quarter results will be released May 26. BUY.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, has brought us a decent profit in the eleven months we’ve owned it, but now it’s time to take that profit and move on. In his update last week, Mike wrote, “In the market, things can change quickly for better or worse, and Pinterest was a good example—three weeks ago, the stock was testing new high ground ahead of most growth stocks, prepping for a high-odds breakout if all went well. But … all did not go well, in fact, nothing did, with the stock soundly rejected at its highs, and then last week, the Q1 report was a dud. Beyond the chart action is our read of investor perception: While no one can be certain, management’s disappointing guide for user growth (U.S. users in Q2 might be down from a year ago!) reinforced the bearish view that the pandemic (and its forced stay-at-home lifestyle) was the main driver of last year’s business surge, so the future will be bleak. To be fair, earnings estimates are still going up as revenue-per-user is surging, but user growth was a key reason for PINS getting going last fall, and it’s what big investors are keying off of now. Any way you slice it, PINS’ action of the past few months looks ugly, and while a bounce is possible, there’s likely to be a lot of eager sellers on upticks. We had taken partial profits twice earlier and sold the rest of our stake earlier this week.” SELL.

Realty Income (O), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, looks fine and is still a good buy. In his update last week, Tom wrote, “Realty got a boost after it announced it’s acquiring VEREIT (VER), a similar company that’s about 60% the size of Realty. Usually, the price of the acquiring company falls after such an announcement. But shares of O moved higher on the day. The market seems to like the deal. A big part of the market’s approval is the fact that the all-stock merger should be accretive to earnings immediately, to the tune of about 10%. It gives O a shot in the arm when it had solid momentum already.” BUY.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, came very close to breaking out to a new high two weeks ago, but now the sellers are in charge, pushing the stock below its 50-day moving average today—for no obvious reason. In his latest update, Carl wrote, “Earnings are expected out on May 18. There is no reason not to expect another great quarter so I’m keeping this stock a buy. We have taken profits several times over the remarkable rise of this stock. It is a great momentum stock in the world’s fastest growth markets of Southeast Asia.” BUY.

SelectQuote (SLQT), originally recommended by Mike Cintolo in Cabot Top Ten Trader and subsequently in Cabot Growth Investor, is a young stock (it came public last May) that hit a record high in mid-April and has pulled back normally since. In his update last week in Cabot Growth Investor, Mike wrote, “If the environment can right itself, we still think SLQT can enjoy solid upside as its growth stories play out. Of course, like everything else, earnings will be key—the company will release results next Tuesday (May 11), with analysts looking for a 75% hike in revenue and a 71% surge in earnings. Beyond the numbers, though, is the story, which lends itself to a lot of growth in the years ahead: SelectQuote is relatively rare merchandise, operating the leading insurance distribution platform, with a top position in Medicare-related and life insurance, demand for which is obviously going up in the years ahead as the population ages. And the firm isn’t just resting on its laurels—this week it announced it’s broadening its focus by launching Population Health, which will help seniors find primary care and pharmacy offerings (it also acquired a specialty medical management pharmacy), effectively leveraging SelectQuote’s huge lead generation operation to serve a whole new set of providers. Back to the stock, we don’t think SLQT is broken, but we also can’t ignore today’s move—we’ll switch to a Hold rating and see how the stock performs on earnings next week.” I’ll follow Mike’s lead. HOLD.

Sonos (SONO), originally recommended by Tyler Laundon in Cabot Early Opportunities, hit a new high the day after we bought it but now it’s pulled back well below its 50-day moving average and our loss is growing. What’s quite possible is that the firm, like Pinterest, is seeing slower growth as pandemic constraints on people are lifted and people become less focused on their homes, but the release of the quarterly report on Wednesday, after the market close, will tell us more. For now, I’ll downgrade it to Hold. HOLD.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains a long-term hold for investors with big profits, because there’s still plenty of growth opportunity in both the automotive and the energy business, but short term, I think the stock is too high-profile (in the news every day—and Elon Musk on Saturday Night Live) and too highly respected to do much on the upside. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, this morning announced the acquisition of Harvest Health & Recreation (HRVSF), creating a leading U.S. multistate operator with combined 2021 estimated revenue of $1.2 billion. Upon completion of the transaction, as well as the closing of other previously announced acquisitions by Harvest and Trulieve, the combined business will have operations in 11 states, composed of 22 cultivation and processing facilities with a total capacity of 3.1 million square feet, and 126 dispensaries serving both the medical and adult-use recreational cannabis markets, with leading market shares in Arizona and Florida. Fundamentally, this deal is not surprising. In fact, it follows closely an article in Barron’s last weekend that argued the leading U.S. multistate operators were good values, given their growth metrics. But I did note last week in an update to Cabot Marijuana Investor readers that TCNNF was a laggard among the first-tier operator stocks, and I downgraded it to hold. And now with this acquisition news and the market’s response (HRVSF up and TCNNF down a little), the downgrade makes even more sense. Note: management will release first quarter results on Thursday, May 13, before the market open. HOLD.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, gapped down last week after releasing its first quarter report, so we will now sell and take a modest loss. In last Thursday’s update Mike wrote, “The Q1 report was very solid, with gross bookings actually up 24% from a year ago, driven by a whopping 166% gain in Delivery bookings, with normalized revenue up 11% from the prior quarter (Delivery revenue up 230%!). EBITDA, while in the red, topped expectations as well. But it wasn’t enough, with investors instead keeping their focus on the U.S. decision to classify gig economy workers (like Uber’s drivers) as employees; management said it can handle the cost, but Wall Street is pessimistic, driving the stock toward its 40-week line and below our stop. Honestly, we still think UBER will eventually have a sustained run, and if it shapes up down the road we could take another swing at it. But the fact that it’s constantly run into resistance in recent months is a sign it needs more time, seasoning and clarity on its business and costs before big investors give it their blessing.” SELL.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Explorer, continues to slip lower. In his update last week, Carl wrote, “Shares again lost ground this week, trading just short of a price that’s three times our entry point. Since we have taken profits several times at higher prices, I think we should keep holding our remaining shares to see if the company can get back on track and be operational this year. It will likely be summer before the ship, designed and manufactured in California, undergoes glide flight-testing. I’m keeping this stock a hold for now.” That’s fine with me, given our profit, but this is clearly not a place to put the rent money. HOLD.

The next Cabot Stock of the Week issue will be published on May 17, 2021.

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