May 17, 2021

Growth stocks remain under pressure in the market; we sold two last week and I’m recommending selling three more today. When it comes to growth stocks, cutting losses short (and taking profits while you have them) is important.

Still, the market as a whole remains in an uptrend, so I remain bullish long-term. Plus, Cabot’s analysts continue to find plenty of attractive stocks, using a variety of methods. Today’s recommendation is actually a growth stock, boasting both accelerating revenue growth and an attractive chart pattern. This may be an ideal buying point.

Details inside.

Cabot Stock of the Week 348

Growth stocks continue to struggle, and thus overall, I think it’s wise to lean toward larger value-oriented stocks; my last two recommendations have certainly filled that bill. Still, the value of diversity is not to be underestimated, so today I’m swinging back to the growth side of the aisle, with a company that actually has accelerating revenue growth (one of my favorite metrics) as well as a chart that’s on a normal correction. The stock was originally recommended by Tyler Laundon in Cabot Early Opportunities, and these are his latest thoughts on this week’s stock.

HubSpot (HUBS)
In 2004 two MIT graduate students, Brian Halligan and Dharmesh Shah, noticed that shopping and buying behaviors were changing. People no longer wanted to be interrupted by increasingly obnoxious marketing messages, like direct mail, telemarketing, cold calls and spam emails. Those forms of outbound marketing began to be ignored because, as David Meerman Scott articulated so well, consumers didn’t like it when companies tried to "… buy, beg, or bug their way in.”

Brian and Dharmesh were early in seeing the power of inbound marketing. The big idea behind the movement was that people would rather be helped and entertained than bombarded with senseless and unrelatable offers. A more effective strategy was to promote companies, products and services through blogs, video, podcasts, e-newsletters, SEO, social media and other forms of inbound content.

The result of Brian and Dharmesh’s vision was HubSpot (HUBS), which was born in Cambridge, Massachusetts in 2005. The company is a cloud-based provider of inbound marketing tools for website content management, blogging, email campaigns, SEO, social media monitoring, CRM and more. It currently has a market cap of $23 billion.

HubSpot primarily serves small- and mid-sized companies. Its single console platform provides ease of use and a wide range of tools for marketing professionals to do their thing, namely generate leads, convert leads to customers and drive customer retention.

The company has been hugely successful to date, and the future looks just as bright as the past. Digital transformation is a massive trend among companies both large and small, and HubSpot already has over 113,000 customers.

Recent efforts to build out new products (called Hubs), such as Service Hub and Operations Hub, expand the potential market beyond HubSpot’s core Marketing and Sales Hubs. With a large and established partner network (hundreds of digital marketing agencies) and a large inbound sales organization, HubSpot is working to move beyond its small business focus and grab more of the enterprise market.

While the market has been choppy for growth stocks, HubSpot’s stock has been holding up relatively well, especially when compared to other software stocks.

Management reported Q1 2021 results on May 5, delivering results that beat on both the top and bottom lines. Revenue grew by 41.4% to $281.4 million (beating by $17.5 million) while adjusted EPS of $0.31 grew 3% and beat by $0.02. Subscriptions were strong and record customer additions (up 45% to 113,925) helped as well. A new Operations Hub landed 500 customers in the first 10 days, suggesting yet another successful new platform addition.

Management also provided full-year guidance, calling for revenue growth of 40% to $1.24 billion (at the midpoint). Guidance was above consensus estimates. Full-year EPS is now seen up 24% to $1.64. Altogether, it is possible HubSpot can grow revenue by 30% or more in each of the next three years, and in the mid-to-high 20% range for several years thereafter.

The report, the stock’s relatively solid reaction and price target increases from analysts all suggest HUBS can continue to do its job. The durable growth profile and leadership position in a hot market where demand is soaring makes the stock extremely attractive. That’s especially true given the recent pullback to the stock’s 50-day line.

HUBS came public in 2014 and was a solid performer through mid-2019. A big drawdown during the Covid market crash last year reset the stock for a big rally since. HUBS broke out above its pre-pandemic high of 208 last summer.

Another big breakout sent the stock from 420 to 547 in February, then a 24% retreat took some of the shine off it in March. HUBS then went on to rally to a new high of 575 in April.

There have been some pullbacks for sure (mostly in the 10% to 20% range), including the current one (-13%). But the big-picture pattern has been one of higher highs and higher lows and HUBS has consistently rallied off its 50-day line (roughly). I believe it can do the same now.

Current Recommendations

Cabot’s long-term market timing indicator remains solidly bullish, telling us the market will be higher in the months ahead. That’s good; it gives confidence that the stocks I recommend every week have a great chance to bring you some serious gains. However, it’s always important to listen to what your stocks are doing today—and the sad fact is that many of the most growth-oriented stocks are going down—and the prescription for that is selling. (On the bright side, this suggests that the frothiness that was generated by the generally young and inexperienced investors who drove concept stocks to the moon—albeit temporarily—is abating as they take their lumps.) Last week I recommended selling two stocks (one up 36% and one down 11%), and this week I’m recommending selling three more. Details below.

Changes
Five Below (FIVE) to Hold
SelectQuote (SLQT) to Sell
Sonos (SONO) to Sell
Virgin Galactic (SPCE) to Sell

Barrick Gold (GOLD), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, continues to climb in the wake of last week’s first-quarter report. In his update last week, Bruce wrote, “Barrick reported encouraging first quarter results. Revenues rose 9% from a year ago, helped by higher gold prices (averaging $1,777, up 12% from a year ago) and 90% higher copper revenues, partly offset by a 10% decline in gold volumes. Adjusted EBITDA rose 23%, as costs generally were subdued. Adjusted earnings per share were sharply higher than year-ago results. The company’s mines had strong operating results, overall free cash flow was strong, Barrick remains on track to meet its full-year production guidance, and the balance sheet net cash position improved to $500 million. Barrick announced the first $250 million ($0.14/share) extra dividend, to be paid on June 15th, with the remaining two $250 million extra dividends to be paid later this year. If gold prices remain healthy and the company can refrain from making major acquisitions (no guarantees, although the chairman and CEO both have historically been disciplined stewards of capital), then Barrick could be poised to continue to make sizeable cash distributions to shareholders. Barrick shares have about 13% 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 rose about 3% to $1,837 this past week. On its recurring $.09/quarter dividend, GOLD shares offer a reasonable 1.5% dividend yield. Barrick will pay an additional $0.42/share in special distributions this year, lifting the effective dividend yield to 3.3%.” BUY.

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, found support at 419 last week, which is exactly where it found support in early March. Thus, falling through this level would be bad, but the odds are very good that the stock will move up from this support level. In his update last week, Tom wrote, “The current market is moving away from technology. Although this semiconductor and business software giant should be a phenomenal holding as technology proliferates at ever higher rates and 5G enables a host of new technologies, the current situation is precarious. AVGO is 12% below the high and falling. I’m confident in the long-term prospects for AVGO. This company grew revenues 16 times over in the last 11 years and 99.9% of all Internet traffic crosses at least one of their chips. But we’ll hold off new buying until this market shakes out.” HOLD.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has now dipped below its 50-day moving average, but it doesn’t look like a worrisome trend to me—or to Tom. In his update last week, he wrote, “The infrastructure partnership announced fantastic earnings last week. Funds from operations per unit were up 20.8% versus last year’s first quarter as the strengthening global economy lifted volumes across its assets and recent acquisitions came online. This bodes very well for future quarters. The stock had been trending higher very slowly and remains relatively cheap. It’s a good defensive holding as the market changes personality.” BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser for the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, continues to work on breaking out above 55, the level that has acted as resistance three times since November. In his latest update, Bruce wrote, “The company’s efficiency programs are working, as underlying operating margins expanded by 30 basis points (100 basis points = 1 percentage point). Coke re-affirmed its full-year guidance, which calls for 8-9% organic revenue growth and perhaps 8-12% comparable earnings per share growth which includes a 2-3% positive effect from a weaker dollar (this in effect is a raise, as prior guidance assumed a 3-4% positive effect from a weaker dollar). 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, announced its first-quarter results this morning. Revenue was $86.1 million, up a sizzling 227% from the prior year, and the company achieved positive adjusted EBITDA as well. Selected highlights from the company’s various states: Arizona saw same-store sales up 70%; California saw nearly 3x growth thanks to acquisitions; Colorado saw revenue up 27% over the prior year; Florida saw revenue up 58% from the prior quarter (!) and 3x over the prior year, thanks to dispensary-level supply chain improvements and a 61% increase in cultivation yields; Illinois saw revenue up 2x over the prior year; Massachusetts saw earlier than expected contributions from wholesale revenue—partially offset by supply constraints; New Jersey (also just ramping up) saw retail sales outperform expectations and double sequentially; New York saw revenue up 60% from the prior year; Ohio saw robust performance in both retail and wholesale markets, with same-store sales up more than 3x YoY and wholesale relationships with more than 85% of dispensaries in the state; Pennsylvania saw revenue up 80% from the prior year, and Virginia was the company’s first market to be EBITDA positive in the first quarter of revenue generation, as sales increased more than 50% in each month of operations and average dispensary sales were $165 per basket.

Also, last week Columbia announced the launch of its new retail brand, Cannabist. The first location to launch under the Cannabist brand is the recently opened dispensary in Springville, Utah, which had its first sale Friday, April 30. By the end of May, three existing Columbia Care locations, in Tempe, Arizona; Villa Park, Illinois; and San Diego, California, will become Cannabist branded retail locations, with a pipeline of more than 80 new and existing locations to follow over the next 24 months. The Cannabist retail experience is centered on making shopping for cannabis as simple and approachable as possible, accommodating the vast range of experience levels patients and customers may have when they walk through the doors.

Lastly, I mentioned there what I mentioned here last week—that the acquisition of Harvest Health & Recreation (HRVSF), which had $88 million in revenues in the latest quarter, by Trulieve (TCNNF), reminds us that Columbia could also be an attractive acquisition target for one of the other three major multistate operators. As for the stock, it continues to build a base at 6, and I think it’s a decent buy as the sector continues to act resiliently after its 50% February-April correction. BUY.

Five Below (FIVE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, gapped down last Tuesday with the market, but selling volume was not worrisome and the stock found support at 177 last week, so I’m sticking with it. Our small loss is tolerable. But I will downgrade it to hold. In his update last Thursday, Mike wrote, “FIVE finally got caught up in the broadening selling out there, sinking about 10% in a couple of days, which was enough for us to go to Hold. If you have a loss or a huge position (whatever that means to you), we’d probably consider taking a few chips off the table; the volume on the selloff, while not outrageous, points to some further near-term issues. That said, the weekly chart isn’t bad at all and nothing’s changing with the story—given the fact that we’ve already taken partial profits and our massive cash position, we’re OK holding longer, as we still think there’s another good-sized uptrend coming after this correction.” HOLD.

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, also gapped down last Tuesday, but overall, the chart looks fine. And now there’s an earnings report to chew on. In his update last week, Bruce wrote, “First-quarter results were strong. Automotive segment revenue of $29.1 billion was unchanged from a year ago, while adjusted net income of $2.25/share compared to $0.62/share a year ago when the company aggressively adjusted its operations and credit reserves for the then-accelerating pandemic. Compared to the $1.05/share consensus estimate, results were sharply higher. GM also reaffirmed its guidance for full-year EBIT of $10-11 billion (“seeing results coming in at the higher end of this range”). Guidance for EBIT of $5.5 billion for the first six months of 2021 implies a sharply weaker second quarter following the $4.4 billion first quarter EBIT. With all the concerns over the semiconductor shortage, the first quarter earnings and the forward guidance were encouragingly robust. Automotive profits were driven mostly by higher pricing: GM redirected its resources toward higher-margin and higher-demand vehicles to adjust to the component shortage. While volumes were subdued, GM sold more higher-margin vehicles and gave fewer discounts. Higher prices were only partly offset by rising input costs. GM lost market share as retail inventory is tight (likely boosting 2Q sales and pricing) and as low-margin fleet sales were only 17% of sales compared to almost 28% a year ago. Automotive cash flow was $(1.1) billion, as a huge $4.7 billion inventory build consumed cash, partly driven by rising numbers of mostly-produced vehicles that are waiting on semiconductors. GM International was breakeven for the second consecutive quarter after years of losses. The China operation was decently profitable. GM Financial remains highly profitable, buoyed by charge-offs at only a 0.8% rate and retail delinquencies at a modest 1.9%. GM Financial’s results remain impressive at $1.2 billion in operating profits helped by low credit losses and higher used vehicle prices (boosting their proceeds when they offload cars coming off-lease). GM’s Automotive balance sheet remains sturdy, with cash of $19 billion fully offsetting automotive debt of $18 billion.

“The company outlined their goal of ‘#1 EV market share in North America,’ with ‘margins similar to or higher than ICE (internal combustion engines)’ and selling 1 million+ EVs globally by 2025. These are simple and clear goals that indicate GM’s ambition as well as assuage investors’ worries about the profitability of EVs.

“One frustrating aspect of GM is its vast capital spending. We appreciate the need for the heavy investment in EVs – this is a driver of GM’s future and is much-responsible for the surge in GM’s share price. However, the $9-10 billion in 2021 capital spending will consume all but $1-2 billion of the company’s cash flow this year and a good bulk of it next year (assuming that the auto cycle doesn’t fade and the company doesn’t make any major acquisitions or new investments). We recognize that GM said that the chip shortage will cost it $1.5-2.5 billion of free cash flow this year (implying FCF of $3-4 billion if no shortage, but this ignores the price-enhancing benefit of a car shortage that is produced by the chip shortage).

“Low free cash flow places more pressure on the valuation of its emerging EV operations which are impressive but remain speculative. Helping support the valuation are recent investments in Cruise from Walmart, Honda, Microsoft and

“GM shares have 12% upside to our 62 price target. We are on the border of selling this stock, given the risks, but for now are keeping the Hold rating. On any meaningful strength in the shares, we could move to a Sell.” 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, climbed higher for five days after releasing a good first-quarter report, and now it’s on a normal pullback. In his update last week, Bruce wrote, “Molson Coors’ first quarter results were encouraging, as revenues and profits showed respectable resilience. Revenues fell 10% from a year ago but were about 2% above estimates. Adjusted earnings per share of $0.01 was much better than the $(0.11) consensus estimate. Underlying (adjusted) EBITDA of $280 million fell 21% from a year ago. The company maintained its full-year guidance, including for operating margins of between 7-10%, against more dour investor expectations. Molson produced reasonable results despite some notable headwinds, including closure of U.K. pubs, the Texas winter storms and a cyber-security problem. Its core brands gained market share and achieved 2% higher pricing. Non-beer/hard seltzer products appear to be selling well, and the company has a fairly aggressive new product introduction cadence that sounds encouraging. Total and net debt were largely unchanged. TAP shares rose 3% in the past week and have about 1% upside to our 59 price target. The shares trade at 15.1x estimated 2021 earnings of $3.86 (up three cents this past week). On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 9.8x current-year estimates, still among the lowest valuations in the consumer staples group and below other brewing companies. As the shares are essentially at our price target and have largely fully recovered from the pandemic, we are evaluating the position. Molson Coors is a stable company trading at a low valuation with contrarian appeal. However, the upside from here is less clear but still may be plenty interesting.” HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, continues to correct, though there’s support ahead at 68, where the stock bottomed in March. In his update last week, Tom wrote, “This combination regulated and alternative energy utility stock had a nice rebound from the recent lows until the middle of April. It has since pulled back again. It appears to be a more sustained bout of weakness than previously expected. It’s a rare departure from the normal uptrend ahead of a very promising environment for alternative energy stocks. Washington will likely not only offer tax breaks and other goodies but should make the sector stand out to investors. Plus, everything that was true about the company when it was flying high is still true.” BUY.

Nvidia (NVDA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is on a one-month correction, but the stock bounced off its uptrending 200-day moving average last week, so I still think prospects are good. BUY.

Realty Income (O), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, is on a normal correction. In his update last week, Tom wrote, “This legendary income stock looks solid. It finally got a move on as REITs rallied. The market also likes the purchase of VEREIT, which the company says will be accretive to earnings to the tune of 10% in the first year. Although the stock has pulled back over the past week after a breakout move, it still looks strong. This REIT is still well below the pre-pandemic price with higher earnings and booming economic growth looming in the months ahead.” BUY.

Schlumberger (SLB), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, has been strong (like other stocks in the oil sector) and can still be bought. 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 three weeks ago, but instead the sellers took over, bringing the stock down to its 200-day moving average just last week—where it bounced. In his latest update, Carl wrote, “Shares seem to be trading within a wide band of 210 to 240 and ended this past week near the bottom of this range. 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.” Earnings are expected tomorrow, May 18, before the market open. BUY.

SelectQuote (SLQT), originally recommended by Mike Cintolo in Cabot Top Ten Trader and subsequently in Cabot Growth Investor, is a bust for the portfolio and should be sold. In his update last week in Cabot Growth Investor, Mike wrote, “SelectQuote was the latest earnings dud, and the report wasn’t even that bad—sales (up 57%) and earnings (up 80%) were solid, and metrics for the firm’s key senior health-related sales were strong (up triple digits again). But management also cut cash flow guidance because of higher spending, as it’s set to attack a larger market. Analysts still think the firm will earn 83 cents per share this fiscal year (ending in June) and $1.27 in fiscal 2022, but none of that mattered—SLQT completely disintegrated after the report as any bad news attracted the bears. If you want to hold onto a piece of the stock for a possible bounce, that’s fine, but in these rare instances the main focus should be on making sure a bad situation doesn’t get much worse. We sold our half-sized stake on a special bulletin yesterday.” SELL.

Sonos (SONO), originally recommended by Tyler Laundon in Cabot Early Opportunities, is also a victim of the shift away from growth stocks. In a Special Bulletin last week, Tyler wrote, “Sonos reported this week and the earnings were good (beat expectations), but guidance was conservative, as there are likely to be cost increases and there are items out of stock. Long term I think the company will be fine but in the near term it feels like the downside risk has increased. Let’s step aside.” Ditto. SELL.

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. Short-term, the stock is on a well-deserved correction, having pulled back from its high of 900. Aggressive investors could actually buy here, with the stock down 36% and riding its 200-day moving average, but my recommendation (again for long-term winners) is to simply hold, because the climate for growth stocks is currently shaky. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, last Monday announced the acquisition of Harvest Health & Recreation (HRVSF), creating the leading U.S. multistate operator (for now), and then on Wednesday announced first-quarter results. Revenues were $193.8 million, up 102% from the year before, while earnings per share were $0.24, up 20% from the year before. That’s all good, and there’s little question that this well-managed firm will be a leading force in the industry for years to come. As for the stock, I downgraded it to hold two weeks ago as the stock hadn’t been quite as resilient as others in the sector (it fell to new lows in April, while the best, like CCHWF, stayed above their late March lows) and I’ll leave it rated hold for now. HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Explorer, continues to slip lower, and because it looks like the stock could easily fall to 10, which is near where we bought it, and because the environment for growth stocks is worsening, I’m going to recommend selling now. Maybe we’ll come back if the stock can strengthen. In his update last week, Carl wrote, “Since we have taken profits several times at higher prices, I will keep hanging on to shares in the Explorer portfolio, but more conservative investors may well want to sell their shares at this point as it may take some time for this stock to gain traction and momentum.” SELL.

The next Cabot Stock of the Week issue will be published on May 24, 2021.

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