November 29, 2021

While growth stocks had a rough time last week, the broad market remains strong, and thus I continue to think you should remain heavily invested as we head into the last month of the year.

Today’s stock has the potential to be a huge winner as it occupies a central position in a world-changing trend, but risk is high—as it should be when potential is high.

On the sell side, Coupa Software (COUP) gets the ax today, as it is going the wrong way.

Details inside.

New Recommendation

While leading growth stocks were hit hard last week, all market trends remain positive, and thus I continue to recommend that you be heavily invested in stocks that meet your investing goals. As always, I recommend diversification, not simply among stocks but also among sectors and investing styles. And as always, I recommend investing in companies that have the potential to be huge successes because they are central to world-changing trends. Today’s recommendation, which comes from Tyler Laundon’s Cabot Early Opportunities, is one of them, as it reminds me of Charles Schwab (SCHW) in the early days. Here are Tyler’s latest thoughts.

Coinbase (COIN)
“Coinbase is one of the leading exchanges for cryptocurrencies. Other options include Robinhood (HOOD), Binance, and eToro.

Coinbase is to crypto what Fidelity, Schwab, TD Ameritrade, etc. are to stocks. If you want to buy, sell, transfer and/or store Bitcoin, Ethereum, Tether, Solana, Cardano, Dogecoin, Litecoin, Polygon and dozens of other crypto assets, Coinbase can help you out.

The company is young, rapidly evolving, growing at a blistering pace and plays in a market (crypto) not well understood by the masses. To put it mildly, a wide range of share price performance outcomes are possible.

The company was founded in 2012 with a vision to create an open financial system so people can make better lives for themselves. That ties in to one of the underlying reasons people want to own cryptocurrencies – they don’t have, or don’t want to work through, traditional banking channels.

This may not seem too important in countries with stable currencies. But if you lived in Argentina or Turkey or some other country where the domestic currency fluctuates wildly (some have lost 50%, 80%, or more of their value at times) you’d probably feel differently.

That said, there are also a lot of people interested in crypto as a store of value, for diversification, or simply a speculation.

Coinbase is an extremely rapid-growth business and likely will be for the foreseeable future as the crypto economy (worth $2 trillion, up from $800 billion a year ago) fights to break into the mainstream.

In Q3 2021 (reported November 9), trading volume grew by a whopping 627% as compared to Q3 2021. Verified users stood at 73 million and retail Monthly Transacting Users (MTUs) grew 252% to 7.4 million. Revenue surged 316% to $1.3 billion.

With that rate of growth you’d think Coinbase would be losing money. But it’s actually very profitable. Adjusted EPS in Q3 was $1.62.

In 2021 analysts expect revenue to grow by 463% (to $7.2 billion) and for adjusted EPS to hit $12.81.

That said, Coinbase is HIGHLY leveraged to crypto market conditions and crypto asset prices, which are volatile at times and drive trading activity on the platform. As a result, there is significant variability in the business.

For example, in Q3 2021 as compared to Q2 2021 trading volume at Coinbase declined by 29%. While the decline was smaller than that posted by global crypto trading volumes (down 37% over the same time frame) it still illustrates the variability underlying this business. Coinbase’s revenue in Q3 was down 39% as compared to Q2.

On the conference call management indicated October was very strong, raising expectations for Q4. It appears volume is growing more rapidly on Coinbase than on peers.

There are a lot of growth initiatives right now. The employee base has more than doubled over the last year (to 2,781 in Q3) and new products include a Prime brokerage aimed at institutional customers, a direct deposit solution, Coinbase Wallet and the Coinbase NFT, a peer-to-peer NFT (non-fungible token) marketplace.

At the end of the day, Coinbase is trying to become more than just a platform for trading crypto (though trading volumes will drive revenue for the foreseeable future) and becoming the main financial account people use for the crypto economy.

COIN came public via direct listing at 250 on April 14, 2021 and rose 31% the first day. The stock then lost ground and spent most of the summer trading between 210 and 250, with the exception of a couple of quick runs above 280.

By the end of September COIN was trading at 224. Shares rallied through October and by the end of the month were at 330. The stock peaked at 357 right before Q3 earnings came out (11/9) then dipped 8% the day afterward. Over the last few weeks COIN has pulled back to just over 300 (30% off the high) and this may be a decent entry point.”

Tim’s note: Mike Cintolo is also watching the stock, and while it isn’t in his portfolio yet, last week he wrote, “Yes, COIN has pulled back sharply, but it looks normal to us coming after a strong six-week advance. We actually think it’s near a lower-risk entry point here but want to see the environment improve for growth stocks.”

Current Recommendations and Changes

Current Recommendations

The broad market remains healthy and our stocks, for the most part, continue to do what we hired them to do. But in keeping with our policy of limiting the portfolio to 20 stocks, something has to go today, and the victim is Coupa Software (COUP).

Changes
Coupa Software (COUP) 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, after a three-week correction, the stock is sitting on its 50-day moving average. In his update last week in Cabot Growth Investor, Mike wrote, “AMBA has been hit hard, but compared to most growth stocks, it’s in OK shape, still trading north of its 50-day line (its first test of the 50-day since getting going in September, which is often a good entry point) and the recent selling volume, while above average, isn’t anything close to what was seen when the stock blasted off. Of course, earnings are due next week (November 30), which will tell the tale. If we were craving cash or had a big position, we might trim some shares here, but with a profit and “only” a half-sized stake, we’ll hold onto what we have—and, if you’re aggressive and don’t own any, we’re not opposed to rolling the dice on a few shares (just a few, not a big position) ahead of earnings.” 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 lower since then and thus is an even better value. In his update last week, Bruce wrote, “BMY shares sell at a low valuation due to worries over patent expirations for Revlimid (starting in 2022) and Opdivo and Eliquis (starting in 2026). However, the company is working to replace the eventual revenue losses by developing its robust product pipeline while also acquiring new treatments (notably with its acquisitions of Celgene and MyoKardia), and by signing agreements with generics competitors to forestall their competitive entry.

At the company’s Analysts Day on November 16, management highlighted in a 140-page slide deck their deepening pipeline of treatments built from internal research, partnerships and acquisitions that they anticipate will more than offset their loss of exclusivity (or, LOE in industry parlance) over the next eight years. Acquisitions remain a top priority and will emphasize small/mid-sized bolt-on deals as well as licensing opportunities.

If Bristol can demonstrate at least the reasonable potential for merely stable revenues during its patent expiration period, which we believe will happen, the shares are remarkably undervalued. On a free cash flow yield basis, assuming an average of $15 billion/year, the shares trade at a 11.7% free cash flow yield.

BMY shares have about 36% upside to our 78 price target. Valuation remains remarkably low at 7.3x estimated 2022 earnings, compared to 12x or better for its major peer companies. The stock’s 6.4x EV/EBITDA multiple is similarly cheap, compared to 9-10x or better for peers.

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 3.4% 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.” This technology stalwart had been spiking higher for about seven weeks and was at a new high, but the selloff in the technology sector drags AVGO down with it. As inflation gets worse and interest rates rise, cyclical stocks rally and technology sells off. I don’t really understand why that is. Technology is still where the strong growth is, and that growth should continue regardless of inflation or higher interest rates. Let’s just stay on this horse. BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, hit a record high two weeks ago and has pulled back normally since. In his update last week, Tom wrote, “This infrastructure partnership reported solid earnings and raised the dividend 5%. Then the infrastructure bill passing likely increased investor interest in the subsector. But Brookfield announced an equity offering and BIP pulled back over 6% from the recent high. New shares will dilute the existing share base. But the company has a proven ability to make up more than the difference in profitable investments. The stock has been slowly rebounding since.” HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, gapped down two weeks ago after releasing its third-quarter report, but Bruce says it’s just a better value now. In his latest update, he wrote, “On November 18, Cisco reported a mixed quarter. Fiscal first-quarter earnings rose 8% from a year ago and were about 3% above the consensus estimate. However, second-quarter guidance was at/below the consensus estimate, driving the share price down. Cisco is attracting plenty of new business (orders increased 33% from a year ago, for example) but their ability to produce goods, and their profit margins, were weighed down by component shortages and expedited shipping costs. Full-year revenue and earnings guidance was unchanged and remains roughly in line with consensus estimates, as Cisco is raising prices and addressing the component issues. The balance sheet remained sturdy and cash flow was fine.

With the 9% intra-day price drop following a disappointing near-term outlook, we sent a Special Bulletin recommended buying shares on the price dip, as the shares looked more attractive at the lower price and as the long-term fundamental picture remains healthy. CSCO shares have about 9% upside to our 60 price target.” BUY

Coupa Software (COUP), originally recommended by Carl Delfeld in Cabot Explorer, is expected to release third-quarter financials on December 6, but the stock has been hitting new lows. As the weakest stock in the portfolio, it gets the boot today. SELL

Dexcom (DXCM), originally recommended by Mike Cintolo in Cabot Growth Investor, has pulled back sharply since hitting a record high two weeks ago, but the pullback looks normal. In his update last week, Mike wrote, “DXCM is one of those situations where, just looking at the last few days, it acts awful, but when looking at the chart, shares really haven’t done anything wrong (yet); the stock pulled back to its 50-day line at yesterday’s lows, which is acceptable, and being the second test of that support area since the June breakout, it ‘should’ find support here. Of course, if it doesn’t, that would tell us something, but right here we advise gritting your teeth with your half position; if you don’t own any, taking a swing at it here near support is fine.” BUY

Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, gapped down four weeks ago after reporting third-quarter results and the stock has been working to stabilize itself since. In his update last week, Mike wrote, “FND doesn’t look great, and we continue to keep our eyes open should the sellers really show up. But if anything, it’s shaped up a bit in the past couple of weeks, and even found some solid support yesterday near its 50-day moving average. Our leash isn’t limitless, but we’re optimistic the Berkshire Hathaway news (Warren Buffett’s company invested $99 million in FND) could help perception. Overall, we’re just following our plan and are OK holding north of the 120 area (give or take).” HOLD

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has pulled back normally from its high of two weeks ago. In his update last week, Bruce wrote, “As described in further detail in our November 3 note, 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 it 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. For now, we’re keeping our Buy rating, yet are thinking a lot harder about this stock. GM paid an estimated $150 million to acquire a 25% stake in Pure Watercraft, a Seattle-based maker of EV boats and outboard electric engines for boats. This is an interesting experiment in a potentially decent market. GM shares have 11% 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, has been trouble-free since our buy in May. It hit another new high two weeks ago, pulled back normally to its 25-day moving average, and now is heading up again. 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 Monday. 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.’ 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, is an interesting case today, as third-quarter results have seen the stock pull back to its 200-day moving average for the second time since we added it to the portfolio nearly two years ago. Total third-quarter revenue was $2.7 billion, up 122% year-on-year. Total gross profit was $1.0 billion, up 147.5% year-on-year. E-commerce revenue was $1.5 billion, up 134.4% year-on-year. But the loss per share was $0.84, leading some analysts to wonder when this fast-growing company will show a profit. In his update last week, Carl wrote, “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 after the recent pullback, but long-time holders should definitely take partial profits.” Carl, of course, has been recommending such partial profit-taking for many months, and I’m sure some of you have been doing just that, especially if the position was growing uncomfortably large in your own portfolio. But I would not be too quick to sell here at the 200-day moving average, because the odds of a rebound are good, and the compounding effect of those profits can be very powerful. 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, “Sensata is a $3.8 billion (revenues) producer of nearly 47,000 highly engineered sensors used by automotive (60% of revenues), heavy vehicle, industrial and aerospace customers. About two-thirds of its revenues are generated outside of the United States, with China producing about 21%. 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 24% upside to our 75 price target.” BUY

Signet Jewelers (SIG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit another record high last week and has pulled back normally to the 25-day moving average, so trends are still 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 five weeks ago, is a young, fast-growing stock with great prospects as a fast-growing (and very highly valued) cloud enterprise data warehouse services provider. The stock hit a record high two weeks ago, dropped sharply to its 50-day moving average, and has been moving up since. Third-quarter results will be released after the market close on December 1, and the market’s reaction to that may likely determine whether we hold further or sell, but risk-averse investors could take the small profit now. HOLD

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains a very strong stock; after hitting a record high of 1,243 four weeks ago, it dropped to only its 25-day moving average before buyers took control. As with SE discussed above, long-term investors with big profits could take some off the table, but the long-term prospects remain bright, particularly as Tesla expands into the energy industry. News today is that CEO Elon Musk is now encouraging workers not to rush so fast to deliver cars by quarter’s end by paying expediting fees but to pay more attention to reducing costs. Wall Street analysts love that kind of talk. HOLD

U.S. Bancorp (USB), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is a slow-moving stock with a good dividend, and the current pullback to the 200-day moving average looks like a fine buying opportunity. In his latest update, Tom wrote, “This is a good stock to own as inflation gets worse and interest rates move higher. It should actually be a beneficiary of the looming economic issues. I like the bank’s prospects over the intermediate term.” BUY

Veeco Instruments (VECO), recommended by Carl Delfeld in Cabot Early Opportunities, gapped up big four weeks ago after releasing an excellent third-quarter report and has been treading water since as its 25-day moving average caught up. In his update last week, Carl wrote, “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% and even better for earnings. Veeco is growing earnings at a 20% clip and represents a backdoor play on semiconductors. Our expectation is that Veeco is building a base to move a leg higher.” BUY

Verano Holdings (VRNOF), recommended by yours truly in Cabot Marijuana Investor and featured here two weeks ago, has seen its stock pull back in sympathy with all the marijuana stocks, but the good news is that they all remain above the lows of early November, so this new uptrend still has a good chance of surviving. If you haven’t bought yet, you can buy now. BUY

The next Cabot Stock of the Week issue will be published on December 6, 2021.