May 3, 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.

Today’s recommendation is a high-yielding stock that has a great history of performance—and as it’s still working its way back toward its high of February 2020, it’s attractive technically.

As for our current holdings, there are no changes. With the new addition, the portfolio is fully invested.

Details inside.

Cabot Stock of the Week 346

With the S&P 500 and Nasdaq Composite hitting new highs just last week, there’s no question that we remain in a bull market, and thus there’s no question that we should remain heavily invested. At the same time, signs of risk continue to appear, so it’s important to manage your own risk, and one way is to hold some relatively solid low-risk dividend-payers, like today’s recommendation. The stock was originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor and here are Tom’s latest thoughts.

Realty Income (O)
Realty Income is one of the highest-quality and best-run REITS on the market. Cash flow from a conservative portfolio of 6500 properties has enabled the company to amass a phenomenal track record of paying monthly dividends; to such an extent that Realty Income actually has the audacity to refer to itself as “The Monthly Dividend Company.” The large REIT has operated for over 51 years and currently has 6500 properties rented to 600 different tenants in 49 states, Puerto Rico and the United Kingdom. Since its 1994 IPO, Realty Income has amassed a record as one of the most successful income investments on the market.

Here are a few things to like about it:

• 2% average annual total return since 1994
• 609 consecutive monthly dividends
• 94 consecutive quarters of dividend hikes
• 4% annual dividend growth since 1994
• Sky-high credit ratings

How do they do it? The company buys established properties with a proven record of profitability and rents them to high-quality tenants. The business model is to generally use a “sale-leaseback” arrangement whereby Realty Income purchases the property from the tenant and then the company remains there and pays rent under long term leases of 10 to 20 years.

Most of these leases are also “net leases,” meaning the lessees pay all the costs associated with the property including maintenance, insurance and taxes. This arrangement frees Realty Income from unpredictable expenses and the REIT just receives regular rent payments with built-in increases over time.

For long-term investors, there is probably no bad time to buy the stock. But there are good times. And this is one of them.

This pandemic was not kind to the REIT sector. In fact, next to Energy and Finance, Real Estate had been the worst performing sector of the S&P 500. As recently as the beginning of March, O was still down about 30% from its pre-pandemic high.

Realty is a retail property REIT, and that subsector took a big hit as lockdowns wreaked havoc on brick and mortar shopping. But O took a much bigger hit than it deserved. Although it has retail properties, the vast majority offer essential services and operated fine during the pandemic. Its largest clients include 7-Eleven, Dollar General, Fedex, Walmart and CVS. There are some issues with its fitness center and movie theater properties, but not enough to justify the rotten stock performance.

Consider that in 2020, both revenue and adjusted funds from operations (AFFOs) increased from the previous year. AFFO per share increased 2.1% in 2020. And that’s in one of the worst years for the retail economy in decades. O has been wallowing while offering great value. But investors didn’t care, until recently.

After moving sideways since last spring, O has come back to life. The stock has moved up 15% since the beginning of March as investors rediscovered the long-neglected REIT sector after the cyclical rally. Realty stock also got a boost last week 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.

This is one of the best income stocks of all time. It got knocked back in a very weird market environment, despite the fact that the REIT proved its resilience during the pandemic. It’s still a good buy at about 15% below its pre-pandemic high ahead of a rapidly improving environment and rebounding earnings. It isn’t as cheap as it was, but now it has momentum.

Current Recommendations

Overall, our stocks are acting well. Yes, it’s been a while since most have hit a new high, but their charts are generally constructive, so odds are that we will see new highs again soon. With today’s addition of Realty Income, the portfolio reaches its full complement of 20 stocks, and that’s where it will stay, with no sales today. Details below.

Changes
Broadcom (AVGO) to Hold

Barrick Gold (GOLD), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, completed its latest pullback by bouncing off its 25-day moving average last Friday and saw a strong move up today. In his update last week, Bruce wrote, “Barrick shares have about 23% 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 fractionally to $1,778 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, has once again pulled back to 450, the level that has provided support several times since March, and if it fails to hold up here, it risks getting kicked out of this portfolio, where I’ve got to sell something (on average) every week. In his update last week, Tom wrote, “Many important companies will report earnings in the days ahead. Technology has been the best performing market sector over the past month. The next few days should determine if the sector resumes its market leadership and dominance, or just bounces around in the near term. Either way, this dominant tech company is a great holding amidst this technological revolution.” Respecting the chart, I’ll downgrade to Hold. HOLD.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, remains on a shallow correction, still trading above its 50-day moving average. It’s likely that some of the expectations of the government’s infrastructure ambitions are already priced into the stock, but if this infrastructure movement is as big as many experts expect, it will last years and BIP should benefit handsomely. BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser for the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, is very close to breaking out above 55, the level that has acted as resistance three times since November, but Bruce is targeting 64. In his latest update, Bruce wrote, “The company’s free cash flow production improved sharply to $1.4 billion, up from $0.2 billion a year ago due to higher profits, improved working capital and lower capital spending. Coke’s balance sheet remains strong, with $12.6 billion in cash, and $32 billion in debt net of cash. To help monetize some latent value and also streamline its operations, the company will spin off its South Africa-based bottling operations. KO shares have about 19% upside to our 64 price target. While the valuation is not statistically cheap, at 24.6x estimated 2021 earnings of $2.18 (up a cent in the past week) and 22.7x estimated 2022 earnings of $2.35 (up 1 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 and featured here two weeks ago, enjoyed its sixth consecutive up day today as buyers poured money into U.S. marijuana stocks. In my issue last week, I wrote, “Two weeks ago, the company announced the launch of its proprietary solid-fill cannabis powder capsule for medicinal use throughout the United Kingdom. The patent-pending capsules, which were first developed and commercialized in the U.S., incorporate a portfolio of primary and secondary cannabinoids and are available in a number of formulations with various THC and CBD doses. Patients over 65 in particular prefer the familiarity of capsules over other delivery methods, like smoking. Columbia’s fourth quarter of 2020 saw revenues of $76.1 million, up 228% from last year (making this the third-fastest grower in the portfolio) and first quarter results will be released Monday, May 17 before the market open (there have been no earnings yet). Just note that because of its low price and trading volume, you should expect CCHWF to be more volatile than most of the other stocks in the portfolio—and that can be good or bad!” BUY.

Five Below (FIVE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is once again trading above 200—but it hasn’t broken free of this level yet. In his update last Thursday in Cabot Growth Investor, Mike wrote, “FIVE continues its pattern of higher lows (the low of the latest dip was 188) while hammering away at resistance in the 200-205 area (where it’s sitting now). Some retail names have been strong, though as has been the case across the market, most of that has come in turnaround situations. As a purer growth play, FIVE has been mostly chopping around. We’re not complacent, but given the fundamentals, the early-stage setup and the stock remaining near its highs, we think the next major move is up.” BUY.

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has more than tripled since its March 2020 low, as investors drawn to its electrification plans have piled into the once-cheap stock—but over the past month, the stock has cooled a bit. In his update last week, Bruce wrote, “GM’s shares are likely to start trading on the prospects for President Biden’s $2 trillion infrastructure bill. Estimates point to as much as $100 billion in federal support for electric vehicles – GM would be a major beneficiary. If the bill isn’t passed, or is passed in a diluted format, GM shares could be vulnerable. The chip shortage appears to be spreading, and although GM has said its 2021 guidance factors in $2 billion in direct and indirect impacts, we have no way of knowing what conditions are included in this guidance. GM shares have 6% 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. GM reports on May 5. If the report is strong, reflecting strong volumes and pricing, the shares will likely surge. If the report is disappointing, the shares will slump, perhaps significantly. We have no way of predicting the quarter, and are not in the business of relying on a binary outcome of an upcoming report. On any meaningful strength in the shares, we could move to a Sell. Investor enthusiasm for electric and autonomous vehicle stocks appears to be ebbing, partly due to the immense technical and financial challenges of creating viable vehicles in volume, and partly as SPACs are starting to be shunned as over-hyped speculations. In the long run, less competition helps GM, a near-inevitable EV winner, but its shares could be dragged down in the near-term as EV-enthusiastic investors exit all EV-related stocks. On a P/E basis, the shares trade at 9.2x estimated calendar 2022 earnings of $6.37.” 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 climbed above 60 for the third time in recent months last week, but couldn’t hold up. Still, the long-term trend looks fine. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, broke out above 56 this morning, eclipsing its January high—which means it’s now as high as it was in February 2020. In his update last week, Bruce wrote, “Molson is estimated to produce about 5% revenue growth and a 3% decline in per share earnings in 2021. Profit growth is projected to increase to a 5-8% rate in future years. Weakness this year is closely related to the sluggish re-opening of the European economies, along with higher commodity and marketing costs. The company will likely re-instate its dividend later this year, which could provide a 2.7% yield. TAP shares have about 12% upside to our 59 price target. Earnings estimates fell a cent this past week. TAP shares trade at 13.9x estimated 2021 earnings of $3.80. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 9.3x current year estimates, among the lowest valuations in the consumer staples group and well below other brewing companies.” HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, had a rare deep selloff in February and March and has recovered somewhat, but remains below its January high. In his update last week, Tom wrote, “It’s surprising that this alternative energy superstar sold off ahead of what are likely to be glorious days for clean energy under the new administration in Washington. But it did. There really isn’t a bad time to buy this stock for the longer term. But following a rare selloff is a fantastic time to buy it.” BUY.

Nvidia (NVDA), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, remains on a minor correction, supported by the 600 price level and still trading above its 25-day moving average. If you haven’t bought yet, you could buy here. First quarter results will be released May 26. BUY.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, gapped down last Wednesday after releasing its first quarter report, and here’s what Mike wrote on Thursday: “PINS was walloped on earnings yesterday, mostly due to fears that user growth, which boomed during the pandemic, is set to slow going forward (at least according to management’s guidance). However, what’s interesting is that, not only did the Q1 numbers top estimates (sales up 78%, earnings of 11 cents were four cents above expectations and up from a loss a year ago), but the top brass upped their Q2 outlook as revenue-per-user (a key metric and one where Pinterest has tons of upside) picks up in a big way. Still, we’re not going to whistle past the graveyard—the combination of yesterday’s reaction and the prior rejection at the old highs gives the chart a questionable look. The low of this correction was back near 60, and we’ve already taken a couple of rounds of partial profits, so we’re not looking to sell here, but the evidence is worsening. We’ll hold for now, but we’ll use a mental stop in the low 60s, and possibly more important, we’d like to see the stock find support during the next couple of days.” HOLD.

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 last week and has pulled back moderately since. In his latest update, Carl wrote, “Sea is led by its gaming group, Garena, which in the fourth quarter of 2020 grew bookings 111% year over year while the number of quarterly users grew 72% year over year to 610 million. 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, “In the market, things often happen in threes, and indeed, growth stocks as a whole have seen three selling waves in this correction. SLQT has followed a similar pattern, with three pullbacks beginning in early March—all of which, though, came at higher levels (24, 26, 28.5) and found support right near the 50-day line. Has this been enough to wear/scare out the weak hands? We’ll find out (earnings are due May 11), but SLQT certainly seems as if it wants to head higher if the meat-grinder growth stock environment dissipates. We’ll stick with our Buy A Half rating.” BUY.

Sonos (SONO), originally recommended by Tyler Laundon in Cabot Early Opportunities, hit a new high the day after we bought it and now it’s pulled back to its 25-day moving average (on low volume), so the pattern looks fine. Quarterly results will be released May 12 after the market close. 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, but short-term, I think the stock is too high-profile (in the news every day) and too highly respected to do much on the upside. First quarter results, released last week, were terrific, but the stock sold off in response. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, gapped up this morning as buyers rushed into U.S. marijuana stocks. In my issue last week, I wrote, “The biggest seller of marijuana in Florida, with 81 stores, a 51% market share and a record of profitability since 2017, Trulieve is a well-managed company with excellent prospects as it expands into other states (California, Massachusetts, Connecticut, Pennsylvania and West Virginia). Revenues are the slowest-growing among the four U.S. industry leaders (Q4 saw $168 million, up “only” 111% from the year before), but the company’s record of profitability has been impressive… Note: management will release first quarter results on Thursday, May 13, before the market open.” BUY.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, continues to trade in the range between 50 and 60 that has contained it for most of this year—which is good considering the “bad news” that came out last week. In last Thursday’s update Mike wrote, “UBER had been settling down smack dab in the middle of its multi-month range, which was fine by us, but today news that the administration favors classifying so-called gig workers (including Uber drivers) as employees (thus raising costs) took a chunk out of the stock. We still think the fundamental (Rides growth accelerating, Delivery growth at triple digits) and technical (higher lows for many months; big volume clue two weeks ago) picture point to an eventual upside breakout, but if today’s weakness spreads, we’ll once again switch back to Hold. The next test will come on May 5, when Q1 results are due out. For now, we’ll stay on Buy, but keep new positions small this close to the report.” BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Explorer, sold off this morning on the news that its quarterly report, expected tomorrow, would instead be released on May 10. On the surface, this is not good, but management says the reason relates to changes in the treatment of warrants issued by special purpose acquisition companies (SPACs), and if that’s the only reason, that’s fine. A little more troubling is the action of the stock, which is now testing support at 20. We still have a double in the stock, but if support here fails, I will contemplate selling—even though long-term prospects are still bright. In his update last week, Carl wrote, “The company announced last week that it is resuming testing next month. It will likely be summer before the ship, designed and manufactured in California, undergoes glide flight-testing. We have taken profits several times, and the share price is more than three times our entry point but 60% off its all-time high so I’m keeping this stock a hold for now.” HOLD.

The next Cabot Stock of the Week issue will be published on May 10, 2021.

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