May 24, 2021

First, a reminder that the market is closed for the Memorial Day holiday next Monday so we’ll publish our next issue on Tuesday, June 1.

This week, the broad market continues to give mixed messages, with growth stocks as a whole lagging, but some newer stocks giving bullish signals. One of those is today’s featured stock. It came public in March and on Friday it broke out to a new high!

As for the current portfolio, there are no changes. Everything is working at the moment!

Cabot Stock of the Week 349

The bull market that began in March 2020 remains in effect, though showing signs of age. Growth stocks in particular have continued to struggle. But some (particularly newer ones) are showing signs of accumulation, and that’s our focus today, with a recent IPO that has just broken out to new highs. This is a relatively high-risk recommendation; volatility can be expected. But the long-term prospects of the company’s services are intriguing. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor and here are Mike’s latest thoughts.

Roblox (RBLX)
New market leadership often comes from new IPOs that have big stories, big growth and (importantly) big liquidity, which is an indirect sign of early institutional sponsorship. (You can bet the IPOs trading $10 million per day aren’t going to get on the radar of the Fidelitys and T. Rowe Prices of the world.) But, in recent months, the IPO pipeline has been full of high-profile landmines; Snowflake (SNOW) and Palantir (PLTR) were both cut in half after peaking earlier this year, while Airbnb (ABNB), which you’d think would be doing well during the economic reopening, has fallen about 40% from its peak.

Still, we think Roblox has all the characteristics of a new, leading glamour stock, with real sales and cash flow growth, and a consumer-friendly story that’s common with many big winners.

If you have young kids, you’re likely already familiar with the company and its hyper-popular app among the younger crowd. On the surface, Roblox is usually put in the same category as other gaming apps, and we can see why; most users spend hours a day goofing around or playing games with others online on the firm’s platform. But Roblox is about far more than just another popular game or two.

Instead, the special sauce here is the entire approach. Roblox and its eight million-plus developers offer countless 3D worlds that allow users to play and generally goof around with their own unique 3D character for free, though many spend also spend a ton of money on avatars and digital items to boost their character. The company calls it “human co-experiences” and it’s a new form of social interaction.

Moreover, as alluded to above, these “worlds” aren’t cranked out by some centralized team of developers. Instead, Roblox allows millions of developers to make their own worlds (and own digital items, and sometimes tools for other developers), and they get paid depending on the popularity of the world and any items that get sold. Interestingly, many of these developers get paid in “Robux,” which is the digital currency of the platform.

Obviously, the better the technology (both for the platform and for devices like the iPad Roblox is played on) and the more worlds that are created, the more fun the platform will be and the more users it will attract. But the potential here goes far beyond random worlds, with the initial obvious one (and one that’s been used by Fortnite) branded worlds that can both produce revenue and serve as major marketing campaigns.

Then there’s the potential for more interactive education—building a world of ancient Rome, say, so people can go and explore what it was like—and for virtual entertainment (virtual concerts, etc.) Again, it extends beyond just the next level of gaming, as the co-experience platform looks like a one-of-a-kind offering.

There’s no doubt the pandemic helped business as kids were stuck at home, which led to two big questions. First, would business slough off as the people came out of their caves, and is Roblox just for seven and 10 year olds who really aren’t going to spend all that much cash? Based on the Q1 report, the answer to both appears to be no. User growth was up 79% in Q1, and even in April, bookings on the platform were up 8% sequentially while the number of users was up further, a sign that business still has momentum. Plus, in Q1, the number of 13-and-older users rose 111% and they now make up nearly half of all users, a strong sign that more teenagers are getting involved.

Not surprisingly, the numbers here are hard to beat; revenues are accelerating wildly, up 46%, 68%, 92%, 110% and 140% during the past five quarters. And while earnings are in the red, that’s because of the (slow) method Roblox recognizes revenue; free cash flow came in at 34 cents per share in Q1 with more expected going ahead.

As for the stock, it came public in early March and has shown excellent price/volume action since; even the failed breakout in mid-April saw good buying before the market dragged it down. And now RBLX is making another go at it, with a big-volume breakout on Friday. Breakouts has been tough of late, but with two straight up weeks on large trade, it looks like institutions are beginning to pile in.

Current Recommendations

Cabot’s long-term market timing indicator remains solidly bullish, telling us the market will be higher in the months ahead, while our intermediate-term indicator continues to reflect the choppiness that we see in so many growth stocks. So overall, while I remain bullish, I’m also careful to reduce risk by weeding out weak performers, because stocks can easily decline for far longer than you expect. Over the past two weeks, the sharp pullbacks in many of our stocks caused us to sell five stocks, but this week we have no changes. Details below.

Changes
None

Barrick Gold (GOLD), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, bottomed at the end of February, we jumped on a month later, and now we’re more than two-thirds of the way to what may be our selling point. In his update last week, Bruce wrote, “Barrick shares have about 8% upside to our 27 price target. The stock trades at a 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 2% to $1,868 this past week. On its recurring $.09/quarter dividend, GOLD shares offer a reasonable 1.4% dividend yield. Barrick will pay an additional $0.42/share in special distributions this year, lifting the effective dividend yield to 3.1%.” BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, found support at 419 two weeks ago (exactly where it found support in early March), and since then it’s rallied rather impressively. In his update last week, Tom wrote, “These are rough days for the technology sector as inflation worries are hurting growth stocks. And AVGO has been held back and dragged down by the overall sector. But the longer-term trajectory for the company is great. Over 90% of internet traffic uses its products, and 5G is coming. AVGO could bounce around for a while longer, but the longer term should be great.” HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is a low-risk stock with a good yield and it’s generally going the right way—so no worries here. In his update last week, Tom wrote, “The infrastructure partnership trends very slowly higher. It’s up about 9% YTD, which is on par with the S&P. The returns haven’t been exciting, but the stock is stable and trending the right way. 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, 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 is discontinuing its Coca-Cola Energy drink – once considered promising but now being cut as sales have been lackluster. We view this as a positive, as the company is more aggressively weeding out its weaker products. It apparently will continue to hold its 19.3% stake in Monster Beverage, currently worth about $9.4 billion. Ironically, Monster’s outlook improved incrementally with the departure of Coke as a rival. KO shares have about 18% upside to our 64 price target. While the valuation is not statistically cheap, at 25.0x estimated 2021 earnings of $2.18 (unchanged in the past week) and 23.1x estimated 2022 earnings of $2.36 (unchanged), the shares remain undervalued given the company’s future earning power and valuable franchise. Also, the value of Coke’s partial ownership of a number of publicly traded companies (including Monster Beverage) is somewhat hidden on the balance sheet, yet are worth about $23 billion, or 9% of Coke’s market value. This $5/share value provides additional cushion supporting our 64 price target. KO shares offer an attractive 3.1% dividend yield.” BUY

Columbia Care (CCHWF), originally recommended in Cabot Marijuana Investor by yours truly, continues to build a base in the 6 area, though there’s still the possibility of a repeat dip to 5.25. But long-term prospects are great. Last week I reported the excellent first-quarter results (revenue of $86.1 million, up 227% from the prior year) and after that the company 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.” BUY

Five Below (FIVE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, gapped down two weeks ago with the market, and has been trying to build a base in the 180 area since—so technically it’s still acceptable. However, the stock is our biggest loser, so it could be a sale on that count; cutting losses short is important for growth investors. But I’m going to hold for now, in part because that’s what Mike is doing. In his update last Thursday, Mike wrote, “Besides the re-implosion of many glamour stocks in the tech, biotech, cloud and Internet fields, the biggest thing we’ve seen over the past couple of weeks is the first signs of the selling spreading to other nooks and crannies of the market. FIVE was a good example, as the stock held near its highs while much of growth was taken out and shot in February, March and April, but finally came under the knife last week, getting hit hard for a couple of days before finding its footing. It’s never encouraging to see a stock hit the toboggan slide, and if you have a huge position or a big loss, you might want to trim and/or set a tight stop. But if you’ve been following us, we advise sitting tight with the stock because (a) the damage isn’t that bad at this point, just 11% or so off all-time highs, (b) we still have a healthy profit cushion, (c) we’ve already booked partial profits once (selling a third of our shares in early February) and (d) we’re already highly defensive in the portfolio. Obviously, if the market really falls apart, anything is possible, but we still see FIVE as a name big investors will support on dips—there simply aren’t many growth stories that have this dependability and this long of a runway of growth, with best-in-class store economics across the country (payback of new openings in less than a year). Moreover, as opposed to what most think, its average customer’s household earns $73,000 per year (actually above the average in the U.S.), including 27% that make six figures or more—thus, the firm isn’t just mining low-income people, so the company should thrive no matter what the economic environment (boom times or no). Back to the stock, our leash isn’t limitless, but we’re OK giving FIVE more rope to correct and consolidate as we think the next major move is still up.” HOLD

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has been a great success in the six-plus months we’ve owned it, but it’s now much closer to a buy than a sell. In his update last week, Bruce wrote, “GM shares rose 1% this past week and have 10% 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. First-quarter results will be released tomorrow, May 25. HOLD

HubSpot (HUBS), originally recommended by Tyler Laundon in Cabot Early Opportunities, and featured here last week, was bought on a normal correction and it’s up since then, so we’re off to a good start. Tyler doesn’t provide regular updates on his stocks (because he recommends so many), but Mike Cintolo wrote about HUBS in Cabot Growth Investor last week (it’s a stock of interest, but not in his portfolio yet) and here’s what he wrote: “The vast majority of growth and glamour stocks are still circling the drain, but that makes it easier to spot the few that are holding well. One of those is HubSpot, which has always been a good company, but the stock has changed character during the past year and it’s still hanging around its 50-day line, which is practically heroic in this environment. The company could be next in line in the broad “helping digitize small business” theme, which has launched many winners (Square and Shopify are the two most notable) over the years—HubSpot is becoming the go-to marketing, sales and even website building platform for many small- and mid-sized businesses, focusing on what works these days (inbound marketing, such as free content and experiences that attract and keep users). And as everything has moved online, the firm’s solutions have gone from nice-to-have to need-it-now, and it’s even moving up the food chain, with enterprise offerings that can go up to $3,200 per month. With the right offerings at the right time, growth has picked up: Sales growth is accelerating (up 25%, 32%, 35% and 41% the past four quarters), free cash flow is solidly in the black (about $1.30 per share in Q1 alone) and its customer base is exploding (nearly 114,000 as of March, up 45% from a year ago)—though that’s just a small fraction of the three million potential customers it’s broadly targeting. HUBS has taken on some water during the growth selloff, but it’s far more resilient than most of its peers and has actually shown some tightness during the past couple of weeks, an initial sign that big investors are accumulating. Some more time could be needed, but HUBS is in great position to help lead the next growth stock advance, whenever it begins.” BUY

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, was cheap when we bought it; now it’s not. In fact, it could be a sell. But Bruce is holding. In his update last week, he wrote, “TAP shares trade at 14.5x estimated 2021 earnings of $3.86 (unchanged this past week). We note the 2% increase in 2022 estimates. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 9.7x 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, has a healthy chart for an income-producing stock. In his update last week, Tom wrote, “The highly popular conservative alternative energy play stock had a nice move up from the recent lows but then pulled back again. It’s surprising that it isn’t showing more strength while the new Administration will likely shower it with goodies and prompt investors to focus more on clean energy in the future. I believe NEE will come back into the market’s graces again in the near future.” BUY

Nvidia (NVDA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has shown serious strength on increased volume in recent days, telling us the first-quarter report, to be released in two days, will be very good. BUY

Realty Income (O), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, pulled back to its 50-day moving average a couple of weeks ago, but it’s seen some healthy buying in recent days and is now heading back toward its recent high of 70. In his update last week, Tom wrote, “Realty stock has pulled back over the past few weeks after breaking out of a sideways range it had been in for a year. Despite the action of the past couple of weeks, the move is technically very bullish for O. The REIT should benefit as the economy opens and its affected properties bounce back. It might also benefit as investors opt more toward dividends and defensive plays as the market gets choppy.” BUY

Schlumberger (SLB), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit its highest level in a year last week and has pulled back normally since. BUY

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, has rebounded very impressively from its low of two weeks ago. In his latest update, Carl wrote, “Shares soared after posting another quarter of strong revenue growth. The company reported a 147% year-over-year total revenue growth for the first quarter of 2021. Its digital entertainment segment grew 117%, but it was the e-commerce segment that surged 250% in revenue that really drove the share price increase. The company reported total adjusted (before income taxes and depreciation) profits of $88.1 million, compared to $48.7 million a quarter ago and a loss of $69.9 million a year ago. 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

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, however, investors’ focus is on all the contenders working to get a piece of the blossoming electric car market (from old-timers like Ford and GM to newcomers like Fisker and Lucid and Workhorse), so the stock has no momentum today. HOLD

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, is one of the four leading cannabis companies in the U.S., as measured by revenues, but the number one leader as measured by profitability, mainly because it focused solely on Florida in its early years. But now it’s expanding rapidly into other states (California, Connecticut, Massachusetts, Pennsylvania, West Virginia), plus it’s announced the acquisition of Harvest Health and Recreation (HRVSF), which will be the largest cannabis acquisition in the U.S. to date. The stock, interestingly, peaked after the average stock in the sector (in mid-March), and then bottomed after the average stock in the sector (in mid-April). Since then, it’s been wedging higher. I’d like to upgrade to buy, but with the sector still looking to re-establish positive momentum, hold is more prudent. HOLD

The next Cabot Stock of the Week issue will be published on June 1, 2021.

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