November 15, 2021

Note: There will be no issue of Cabot Stock of the Week next Monday, as our publishing schedule is fifty issues a year. I hope you have a great holiday with family and friends.

As for the market, it’s still strong, and our portfolio is still fully invested, and today we’re jumping back into the marijuana market (the focus of my other advisory) with a young marijuana stock that just came public this year.

On the sell side, CrowdStrike (CRWD) gets the ax today, as it is going the wrong way.

Details inside.

New Recommendation

All market trends are now positive, and thus I continue to recommend that you be heavily invested in stocks that meet your investing goals. Today’s recommendation comes from my own Cabot Marijuana Investor, where I just last week recommended jumping back into the cannabis sector, where buyers are once again pushing stocks up after a long nine-month correction. Here are my thoughts on both the sector and this young stock.

Verano Holdings (VRNOF)
Once upon a time there was a Canadian company named Canopy Growth (CGC), which developed leading mind share among cannabis investors, and thus was accorded a market capitalization of $23 billion when the sector topped in late 2018, just as marijuana became legal in Canada. Today, that stock is worth just $6 billion, in part because the nationwide legalization led to serious oversupply, which saw all the Canadian marijuana companies working to reduce expenses.

After that, attention turned to the U.S. stocks, led by Cresco (CRLBF), Curaleaf (CURLF), Green Thumb (GTBIF) and Trulieve (TCNNF), all of which are working to build vertically integrated multistate operations. Those four had a fabulous run in 2020, gaining an average of 195%, but the sector peaked in February 2021, after which these stocks corrected an average of 55%, bottoming less than two weeks ago.

It’s been a trying nine months for investors in the sector, but today these stocks are on the upswing again, and the main reasons are fourfold.

First, third-quarter reports from the leading companies in the industry have been excellent, revealing both strong growth and trends toward increasing profitability. The state-by-state basis of U.S. legalization has helped the industry avoid the oversupply problem encountered in Canada.

Second, Republican representative Nancy Mace of South Carolina is expected to unveil a new bill today, the States Reform Act, which would remove marijuana from the federal list of controlled substances and impose a 3.75% federal excise tax (lower than the tax in some Democratic proposals), and the leaked news of this has excited investors.

Third—and not to be underestimated—that 55% correction moved a lot of shares from weak hands to strong hands, and experienced investors know that when the sellers are out of ammunition, the buyers can take control.

Fourth, that correction also made a lot of these stocks comparatively cheap, and while the value lens is the one that I use least when evaluating marijuana stocks, it does reveal some relative bargains today.

So, after being cautious on the sector since February, I’m once again recommending buying, and my top pick today, for investors who can handle the volatility and risk, is Verano.

Headquartered in Chicago, Verano is a vertically integrated multistate operator, with 89 retail locations in 12 states (Arizona, Arkansas, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Nevada, New Jersey, Ohio and Pennsylvania) as well as 11 cultivation and production facilities. (The most recent additions came just last week with the acquisition of Willow Brook Wellness, which yielded the company’s first properties in Connecticut.)

The company’s main brands are Verano (flower, pre-rolls, vapes and concentrates), Encore (gummies, hard candies, mints and chocolates), Avexia (the company’s medicinal brand, blending THC and CBD to alleviate pain and discomfort), Zen Leaf (retail dispensaries) and MÜV (medical dispensaries).

Like most companies in the sector, Verano is working hard to achieve maximum efficiency through vertical integration (in 11 of the company’s current 12 markets), scale, standardization and automation. And in this case, there is evidence of success, with two quarters of positive EPS in the rearview mirror. The second quarter saw free cash flow of $4 million, and the balance sheet showed $150 million in cash at the end of the quarter.

Additionally, the company has been very active on the acquisition front, with 13 deals completed to date. Third-quarter results will be released before the market open tomorrow, and while that event does add risk, I didn’t think it was reason enough to delay adding the stock to the portfolio of Cabot Marijuana Investor (which already held the leading four U.S. companies mentioned above) when I resumed buying last week.

And the reason is this: As the sector’s uptrend continues, it’s likely that all the leaders of the industry will see their stocks rise, but VRNOF, being a young stock, has many more potential buyers than sellers. After coming public in April near 20, VRNOF joined the sector in its downtrend, eventually establishing a double bottom at 10 just last month. But since the buying in the sector exploded just six trading days ago, the stock has been very strong, and thus I’m very bullish on it (again, for investors who can handle the volatility).

Note: If you’d like to reduce your risk a bit, the simplest way to do that is to buy a half position to start now, and then wait until after the earnings report. If you’re ahead then, buy more, but if you’re not, don’t. Averaging up is good practice for growth investors, while averaging down is not; it’s best reserved for value stocks.

Current Recommendations and Changes

Current Recommendations

The market remains healthy and our stocks, for the most part, continue to do what we hired them to do. The one exception this week is CrowdStrike, which gapped down this morning and become our biggest loser. It’s an easy choice for a sell. Details below.

Changes
CrowdStrike (CRWD) to Sell

Ambarella (AMBA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, makes state-of-the-art computer vision chips that are in great demand by intelligent vision systems. And now the stock has finally had a big down day. In his update last week in Cabot Growth Investor, Mike wrote, “AMBA had a big, straight-up run, which left it vulnerable to some sort of shakeout—and the combination of the market’s decline and news that the firm’s CFO is taking a health-related leave of absence led to a whopping big decline on Wednesday. Similar to the market, such a shot across the bow usually has some reverberations, so we do think the odds favor some more selling (or at least choppiness) in the near term. But overall, the decline looks normal given the prior move; for context, the 25-day line is still down around 179. If we had a huge position, maybe we’d consider trimming some shares, but we don’t, owning ‘only’ a half-sized stake (and we still have a modest profit, too). Looking out a bit, earnings are due on November 30, which will probably tell the intermediate-term tale, but all in all, we don’t think anything has changed here—Ambarella’s computer vision chips should see huge demand going ahead, which should kick earnings much higher. If you own some, hold on, and if not, we’re OK taking a swing at a small position around here.” BUY

Bristol Myers Squibb Company (BMY), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, and featured here two weeks ago, has moved a little higher since then but is still a great value. In his update last week, Bruce wrote, “On October 27, Bristol-Myers reported good third-quarter results, with revenues increasing 10% and matching the consensus estimate. Earnings rose 23% and exceeded the consensus estimate by about 2%. Management raised their full-year earnings guidance fractionally. BMY shares have about 31% upside to our 78 price target. Valuation remains remarkably low at 7.6x estimated 2022 earnings, compared to 12x or better for its major peer companies. The stock’s 6.7x EV/EBITDA multiple is similarly cheap, compared to 9-10x or better for peers. The stock continues to perk up, partly due to some brokerage support and to the remarkably low valuation matched with growing revenues, sturdy cash flow and a fortress balance sheet. Either we are completely wrong about the company’s fundamental strength, or the market must eventually recognize Bristol’s earnings stability and power. We believe the earning power, low valuation and 3.3% dividend yield that is well-covered by enormous free cash flow make a compelling story.” BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, was slow getting going, but since it broke out to a new high on October 19, the buyers have been in charge! In his update last week, Tom wrote, “This chip and software infrastructure icon has really found its legs since the beginning of October. It had gone sideways since February but now AVGO is up over 17% in just a little over a month and has been making a series of new all-time highs. The stock started to gain traction after impressive earnings last September. It reports third-quarter earnings again in December. The company is growing earnings better than expected and will likely continue to do so.” BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, reacted well last Monday to passage of the federal infrastructure bill, but then on Wednesday, the stock gapped down after management announced a $1 billion equity offering that will be dilutive to current owners. Yet the stock remains above its 25-day moving average, and the proceeds from the offering will be used to fund new projects (some presumably sparked by the new infrastructure bill), so it’s not too worrisome at this point. In his update last week, Tom wrote, “Last week’s earnings grew a solid 12.6% over last year’s quarter and the company raised the dividend 5%. Brookfield also completed the acquisition of Inter Pipeline last month, which should boost earnings going forward.” HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, dipped as low as 53 in early October but it’s been rallying back since. And Bruce says it’s still a good value; In his latest update, he wrote, “CSCO shares have about 4% upside to our 60 price target. The shares remain attractively valued, and offer a 2.6% dividend yield. We continue to like Cisco.” BUY

Coupa Software (COUP), originally recommended by Carl Delfeld in Cabot Explorer and featured here last week, has a cloud-based global technology platform for Business Spend Management (BSM) that is enjoying strong demand as businesses large and small work to find operational efficiencies. In his update last week, Carl wrote, “Coupa specializes in software providing cloud-based business through its spend management platform. The platform connects organizations with suppliers globally and provides visibility into and control over how companies spend money, optimize supply chains, and manage liquidity, and enables businesses to achieve savings that drive profitability. The company already has 2,000 clients including Amazon and Wal-Mart, with some analysts estimating its potential target market at $94 billion. In its most recent quarter Coupa’s revenue surged 42% and free cash flow reached $643 million. The company is expected to release third-quarter financials on December 6.” BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, broke out to a new high three weeks ago, but the breakout failed, and this morning the stock gapped down, triggering a sell signal from Mike. Here’s what he wrote: “CrowdStrike is flashing abnormal action after yet another analyst downgrade today that cited increasing competitive pressures and slowing growth in the endpoint market. As always, we care less about what analysts say than what big money managers do, but after attempting to break out twice (both times rejected) and today’s huge-volume selling, we’re going to (relatively) quickly cut our loss and look for greener pastures.” SELL

Dexcom (DXCM), originally recommended by Mike Cintolo in Cabot Growth Investor, hit another new high today! In his update last week, Mike wrote, “DXCM has acted just fine during the past few sessions, meandering on light volume near its highs. As with everything else, a dip of a few percent isn’t out of the question if the market has another selling wave, but all indications are that buyers remain in control as they anticipate a big earnings bump going forward as the G6 gains ground and the G7 hits the market.” BUY

Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, gapped down two weeks ago after reporting third-quarter results and the stock has been working to stabilize itself since. In his update last week, Mike wrote, “For the second straight quarter, FND has sold off after earnings, with renewed cost inflation and supply chain worries pulling the stock back to its 50-day line (near 128). Big picture, there’s little doubt that the company is going to get much larger over time, but the Q3 report raised more questions when it comes to the next couple of quarters; earnings estimates have dropped a bit for this year and next as Wall Street expects part of the solid sales growth to be eaten up by higher costs. As we did earlier this year, we’re OK giving FND more rope to allow the long-term uptrend to reassert itself, but we’ll set a mental stop in the upper 110s and take what comes.” HOLD

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, last week equaled its June high of 64, but the stock has yet to get above that resistance level. In his update last week, Bruce wrote, “We have mixed views on GM shares. The valuation is below our target and the company remains a healthy generator of massive cash flow backed by a strong balance sheet. But the company will likely spend heavily on advanced technologies for years – at least through the end of the decade (beyond the 2020-2025 window in which it will spend $35 billion) – draining that cash from shareholders in search of EV profits that are currently speculative. The $1.2 billion infrastructure bill, recently passed by the House, would be a positive for GM in that it improves the affordability (through tax and other credits) and usability (by helping the charger build-out) of EVs. GM shares have 18% upside to our 69 price target.” BUY

HubSpot (HUBS), originally recommended by Tyler Laundon in Cabot Early Opportunities and then by Mike Cintolo in Cabot Top Ten Trader, released a good third-quarter report two weeks ago and the stock hit a new high last week, so all is well. HOLD

Marvell Technology (MRVL), originally recommended by Carl Delfeld in Cabot Explorer, continues to look very strong, with the latest new high tagged just last Friday. In his update last week, Carl wrote, “Marvell’s semiconductor chips are used in a number of growth applications such as 5G wireless networks, cloud computing, automotive, and industrial markets. Several Wall Street analysts have raised estimates and Credit Suisse recently upgraded the stock, calling Marvell ‘one of the most strategic assets in semiconductors.’ Marvell’s semiconductor products are state-of-the-art and in high demand, allowing businesses and consumers to take advantage of 5G capabilities. I recommend buying this stock if you have not already done so.” BUY

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, hit a record high four weeks ago and has been correcting normally since. In his update last week, Carl wrote, “The company expects that its e-commerce revenue will grow 121% for 2021. Southeast Asia’s booming internet economy is set to double to $363 billion by 2025, eclipsing the previous forecast of $300 billion, according to research from Google, Temasek Holdings, and Bain. Shopee also plans to expand into Poland, India and Spain and is looking at Brazil and France. I also see further potential upside to Sea because of strong momentum in its gaming portfolio and increasing fintech revenues. I would be a buyer of this stock, but long-time holders should definitely take partial profits.” HOLD

Sensata Technologies (ST), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, first topped 60 in early January, and since then has been trading in a range between 55 and 60, preparing for its next advance. In his update last week, Bruce wrote, “On October 26, Sensata reported a strong third quarter. Revenues rose 17% net of acquisitions/divestitures, and adjusted earnings increasing 32%. Both were higher than the consensus estimates. Free cash flow was fine, and the balance sheet remains sturdy and under-leveraged, so Sensata is resuming its share buyback program and will probably resume its dividend, as well as also look for more acquisitions. However, the company’s fourth-quarter guidance was light – revenues and earnings were guided to about 3-9% below consensus estimates – due to difficult auto industry conditions and higher inflation. This left the market with an unclear near-term direction. The company’s 2022 outlook remains unchanged. We retain our Buy rating as the longer-term outlook remains encouraging. ST shares have about 27% upside to our 75 price target.” BUY

Signet Jewelers (SIG), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here five weeks ago, hit a record high two weeks ago and has pulled back modestly since—and is still well above its 25-day moving average. Trends are definitely good for America’s largest jeweler. As Cabot Top Ten Trader is generally not a long-term owner of stocks, this may not be a long investment, but I’ll stick with it as long as the trend is strong. BUY

Snowflake (SNOW), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here three weeks ago, is a young, fast-growing company with great prospects as a cloud enterprise data warehouse services provider—and the stock has become even stronger since our recommendation. In last week’s Cabot Growth Investor, where Mike is keeping an eye on the stock but doesn’t have it in his portfolio yet, he wrote, “SNOW is marching ahead on low volume—it’s sort of in no man’s land on the chart, though the growth story is compelling so we’re content to keep watching.” HOLD

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains in the news, as Elon Musk is selling stock to a) abide by a Twitter poll and/or b) raise cash for an anticipated large tax obligation related to options received. More important, the stock has now begun a well-deserved correction. Technically, there’s support at 900 (the level that previously acted as resistance for 38 weeks), but anything is possible; last week I mentioned AMZN’s ten-year correction after the 2000 dot-com peak. Meanwhile, fundamentally, competitors are making inroads, but Tesla still cannot build enough cars to meet demand, so it has raised prices. HOLD

U.S. Bancorp (USB), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, hit a new high three weeks ago and has pulled back normally since. In his latest update, Tom wrote, “USB has been bouncing around near the high point of the recent range. Earnings disappointed the market as the bank didn’t realize higher net interest income in the quarter because rates didn’t move higher until the very end. It may go sideways for a while, but I like the bank’s prospects over the intermediate term. Business is solid in every area except net interest income. But that should rise with interest rates in the quarters ahead.” BUY

Veeco Instruments (VECO), recommended by Carl Delfeld in Cabot Explorer, gapped up big two weeks ago after releasing an excellent third-quarter report. In his update last week, Carl wrote, “Not only did the company beat analysts’ estimates, it also bought back more than $100 million in convertible notes. This is an American high-quality provider of state-of-the-art semiconductor fabrication equipment. The company delivers the leading-edge technology to U.S.-based and international high-end class chipmakers, some of which are 100% reliant on Veeco technology. Revenue growth for 2021 may be up 30%, with even better earnings. Veeco represents a backdoor play on semiconductors.” BUY

The next Cabot Stock of the Week issue will be published on November 29, 2021.