November 8, 2021

With the often-tricky September-October period behind us, and all trends positive, I’m happy to continue recommending that you be heavily invested in a diversified group of stocks that meet your investing needs.

Today’s recommendation is not a familiar name—it serves global businesses, not individuals—but it’s part of the solution to one of the globe’s biggest problems these days.

As for selling, something’s got to go, and it’s not an easy choice; most of our stocks look great. But rules are rules, so we’ll say farewell to long-time friend (and solid winner), NextEra Energy (NEE).

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 Carl Delfeld’s Cabot Explorer, which scours the globe for interesting opportunities, and this week has found one that we will all understand because it’s part of the solution to one of the year’s greatest economic challenges. Here are Carl’s latest thoughts.

Coupa Software (COUP)
There are many ways to get investment ideas but more than one successful investor has mentioned that it often begins with the humble front page of a newspaper. Today, the headline below is appearing almost every day.

America Has Supply-Side Problems
What is the cause of the problem and what stock will benefit?

First, Americans took the money they received from the government and what they previously spent on vacations and dining, and used it to buy goods for their homes, including kitchen appliances, exercise equipment, and office chairs and other devices that quickly transformed homes into offices and classrooms.

All this buying swamped the system, leading to surging fuel and energy prices, power shortages across the world encouraging stockpiling and inflation, semiconductor shortages affecting carmakers, and container ships stuck outside ports made worse by logistical shortages of workers, trucks, and rail.

The median cost of shipping a standard metal container from China to the West Coast hit $20,586 in October – almost double the cost in July, which was already twice the cost in January and 700% higher than the cost a year ago. According to JPMorgan analysts, new vessel orders will not be delivered until 2023, “at the earliest time frame.”

The impact of all this can be seen in sales during the most recent quarter. Car sales were down 68.1%, furniture sales fell 15.4%, and household appliance sales dropped 17.7%.

American ports and warehouses in Long Beach, California, which handles 40% of America’s imports, are full of goods and short of workers and trucks. Since 80% of world freight moves by sea, this part of the supply chain is hitting the headlines. According to Trading Economics, the Baltic Dry Index – a shipping market bellwether – is up 157% over the past year.

But this is just part of the supply-chain chaos issue.

Also important has been the tremendous shift in manufacturing to China, South Korea and Taiwan as well as Southeast Asian nations like Vietnam. This was already a problem since the supply line ran thousands of miles and changes in orders was a challenge. To make matters worse, companies squeezed inventories to the bone to increase profitability.

Then we were hit by the pandemic. Economies went into lockdown. Factories shut down. And shipping companies, in response, cut their operations, which proved to be a big mistake.

Today’s recommendation is part of the solution.

Founded in 2006, Coupa Software (COUP) has a cloud-based global technology platform for Business Spend Management (BSM). Its platform connects organizations with suppliers globally, and provides visibility into and control over how companies spend money, optimize supply chains, and manage liquidity, enabling businesses to achieve savings that drive profitability.

Its platform connects its clients with over 7 million global suppliers, helping them purchase the goods and services they need to run their businesses. At the same time, Coupa’s tools help companies build more robust supply chains and save money through strategic procurement such as pre-negotiated discounts with suppliers and pooling client purchase orders.

All of these transactions create data to which Coupa applies artificial intelligence to gain insights that clients can capitalize on to give them an edge over rivals. Some specific services include procurement, invoicing, expense management, payment platforms, contract management, contingent workforce, supplier risk management, and supply chain design.

The company markets its payments platform and services primarily through a direct sales force. In addition, Coupa has a strategic joint venture with Japan Cloud Computing, and Coupa has an app allowing clients to integrate data and tools with companies such as Microsoft and Workday.

The company already has 2,000 clients including Amazon and Wal-Mart with some estimating its potential target market at $94 billion. While the company is still unprofitable, in its most recent quarter Coupa’s revenue surged 42% and free cash flow reached $643 million.

Fiscal third-quarter results will be released after the market close on December 6, and analysts estimate that earnings will be two cents per share, while revenues will hit $178 million, which would be up 34% from the year before.

As for the chart, after peaking at 377 back in February, it’s bottomed at 200 twice in recent months and I look forward to a gain of 60% as the stock returns to its old high, and likely more beyond that.

Current Recommendations and Changes

Current Recommendations

The rule that this portfolio is limited to 20 stocks was made by me, and there’s no good reason to change it. I think 20 stocks is plenty for anyone; beyond that, you lose focus and each stock loses impact. But sometimes it’s hard to decide what to sell, particularly at times like the present, when most stocks are acting great. Contenders for sale today are Sea Limited (SE), which has been terrific but has to correct sometime; CrowdStrike (CRWD), our only loss—albeit small; Floor & Décor (FND), which gapped down after earnings and may be encountering supply-chain difficulties; and NextEra Energy (NEE), which has been in the portfolio more than two years but lost some of its mojo this year. And the victim is NEE. Details below.

Changes
Dexcom (DXCM) to Buy
NextEra Energy (NEE) to Sell
Snowflake (SNOW) to Hold

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 the stock keeps hitting new highs! Last week in Cabot Growth Investor, Mike wrote, “AMBA will likely report earnings late this month or at the start of December, which is always a risk, especially given the stock’s recent run. However, we’re pleased to see many chip stocks (including those that have exposure to the auto market and electric vehicles, like Ambarella) react well to earnings, and any further announcements of deals with auto makers should help perception. (A deal with Dongfeng Motor Group in China caused the stock to pop in late September.) Moreover, chart-wise, blastoff’s like AMBA’s big move on September 1 usually kick off uptrends that don’t up and die after just three months. We are open to a shakeout given that shares are extended to the upside (50-day line at 156 but rising fast), but we remain optimistic that both the stock and the firm’s bottom line have only recently kicked off a big uptrend. We’re OK buying a half-sized position on dips of a few points.” BUY

Bristol Myers Squibb Company (BMY), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, and featured here last week, has moved a little higher since then but is still a great value. In his update last week, Bruce wrote, “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 has modestly perked 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, “After trending higher at a snail’s pace since the spring, this chipmaker and software company stock has gotten a move on. It’s up 13% since the beginning of October. It doesn’t report earnings for another month, but the market seems to be expecting good things. Broadcom had a solid quarter reported in September. It’s also likely holding up better during the chip shortage as it’s a priority customer. It had been a good value. Now, it’s finally got some momentum too.” BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is a slow grower, but it’s been hitting new highs—and today reacted well to passage of the federal infrastructure bill. In his update last week, Tom wrote, “This infrastructure partnership reported earnings today that grew a solid 12.6% over last year’s quarter and raised the dividend 5%. Results were helped by strong growth in the midstream energy and transportation sectors during the recovery. Brookfield also completed the acquisition of Inter Pipeline last month, which should boost earnings going forward. It’s also important to note that contracts have built in inflation adjustments. The stock is up a little bit since the report.” HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, dipped as low as 53 a month ago but it’s been rallying back since. And Bruce says it’s still a good value. In his latest update, he wrote, “Cisco is facing revenue pressure as customers migrate to the cloud and thus need less of Cisco’s equipment and one-stop-shop services. Cisco’s prospects are starting to improve under a relatively new CEO, who is shifting Cisco toward a software and subscription model and is rolling out new products, helped by its strong reputation and entrenched position within its customers’ infrastructure. The company is highly profitable, generates vast cash flow (which it returns to shareholders through dividends and buybacks) and has a very strong balance sheet.

“CSCO shares have about 5% upside to our 60 price target. The shares remain attractively valued and offer a 2.6% dividend yield. We continue to like Cisco.” BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, broke out to a new high two weeks ago, but the breakout failed, sending the stock back down to its 50-day moving average, which the stock is tracking higher now. In his update last week, Mike wrote, “As we mention briefly later in this issue, timing is vital in this environment, especially when it comes to entry points, and there’s little doubt our timing is off so far when it comes to CRWD; two days after we entered, the stock was powering ahead to new highs, but some weakness in growth stocks and an analyst downgrade (which raised the specter of competition and slowing growth) have caused a buyers strike. Fundamentally, we’ll have to see it to believe it when it comes to competition; in the last conference call, management was openly discussing how, while CrowdStrike has 13,000-ish clients now, the best legacy players have around 100,000, implying a massive runway of growth in the years ahead. Plus, the firm’s latest batch of new product announcements should attract new customers and provide plenty of cross-sell opportunities to its client base. That said, we’re not ignoring what the stock has done; the failed breakout wasn’t good to see, and even today’s bounce came on tepid volume compared to the downgrade-inspired retreat. A drop to 250 or below could have us cutting the loss, but tonight we’re going to stay on Buy, believing the weight of the evidence remains tilted to the upside.” Makes sense to me. BUY

Dexcom (DXCM), originally recommended by Mike Cintolo in Cabot Growth Investor, hit another new high last Wednesday and remains very close to it today. In his update last week, Mike wrote, “Dexcom is a familiar name if you’ve been with us for a while—the company has long been a leader in continuous glucose monitoring systems (CGMs), an industry that has definitely caught on but has tons of growth potential going forward, with just 40% of Type 1 diabetics and half of insulin intensive Type 2 diabetics in the U.S. (and less overseas) currently using a CGM. Competition (mainly from Abbott) and other factors occasionally affects this stock, which has a history of cooling off for a year or more before getting going again (often because of a fresh catalyst). And that seems to be happening now—sales growth has remained solid in the 25% to 30% range, but DXCM began to emerge in June as investors looked ahead toward the launch of its G7 device later this year (in Europe) and likely early next year (in the U.S.). Earnings are expected to lift nearly 30% next year, and the stock reacted well to earnings after a six-week rest. It won’t be the fastest horse, but we think another major uptrend in DXCM is underway.” I’ll upgrade to buy. BUY

Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, hit another new high last Thursday, but then gapped down on Friday after reporting third-quarter results Thursday night. Revenues were $877 million, a record high but up “only” 28% from the year before, while earnings per share were $0.60, up 7% from the year before. Today the stock is up a bit, and still well above all its moving averages, so I don’t see any reason for panic, but I will relay Mike’s comments about the report next week. HOLD

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, was strong last week after falling on its third-quarter report, and is now approaching its June high of 64. In his update last week, Bruce wrote, “On the surface, GM’s third quarter looked awful. Nearly every headline metric fell sharply from a year ago: revenues fell 25%, its worldwide market share fell by a huge 1.5 percentage points, adjusted operating profits fell 55% and GM North America margins fell by 4.7 percentage points. Even the stalwart GM Financial saw its profits fall 9%.

“However, the results were much better than analysts had expected. While sales were slightly below the consensus estimate, earnings of $1.52/share “blew away” the $0.97 consensus estimate. And, GM raised its full-year earnings per share guidance by 5%.

“Yet, this new full-year guidance implied a weaker fourth quarter than analysts were expecting. This bad piece of news is what ultimately weighed on the shares, which traded down about 5%.

“Beneath the bad news was some good news: GM vehicles are in strong demand, with more favorable pricing and a more-profitable mix than in the strong year-ago period. The problem was that the company couldn’t complete and then deliver enough vehicles due to shortages of semiconductor chips. We can see this in the 40% increase in GM’s own inventories compared to a year ago – the company has a lot of vehicles sitting around that are mostly completed. The company anticipates some relief in the fourth quarter, which should help profits and cash flow. Another contributor to the weak profits was higher costs – this won’t likely be going away anytime soon. Apparently, the chip shortage is going to be around for a while as well.

“We have mixed views on GM now. Yes, they are an earnings powerhouse and will continue to generate huge profits as long as the vehicle market stays firm. And, the shares remain below our target price, with its EV and other advanced technologies getting little or no credit in the stock market. But, we are not convinced yet that the U.S. is ready to shift to electric vehicles at anything but a snail’s pace. And, it seems doubtful that fully autonomous cars will be road-worthy anytime in the next five years, at least. Maybe EVs can gain a percentage point of market share a year, but this share is currently only about 3%, so it might take until the end of the decade to get a 10% share. This is radically below the consensus and management’s view. Whether this is good or not is hard to say – it would disappoint dreamy tech investors that might drive up GM’s valuation and would show that a lot of GM’s $35 billion of advanced tech spending was wasted. But, it would ensure huge profits from gas-powered vehicles keep rolling in for a long time.

“For now, we’re keeping our Buy rating, yet are thinking a lot harder about this stock. GM shares have 24% 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 last week, and the stock is once again very close to its recent highs. In his update last week, Tyler wrote, “HubSpot reported Q3 revenue of $339.3 million (up 49%), well ahead of expectations. Adjusted EPS of $0.50 was also ahead of consensus. Q4 guidance implies 42% revenue growth as upsells and cross sells of newer solutions continue to pull in dollars from clients seeking HubSpot’s inbound marketing solutions. The stock looks great and digested the report without too much drama. We are now up almost 60% since April. I wouldn’t be surprised to see a pullback in the stock on any broad market weakness but, should that occur, I think it would be another buying opportunity as HUBS’ upward trajectory should continue.” HOLD

Marvell Technology (MRVL), originally recommended by Carl Delfeld in Cabot Explorer, continues to look very strong, hitting record highs frequently. And the stock appeared in Cabot Top Ten Trader last week, where Mike wrote, “Marvell (covered in the July 19 report) is a leading fabless chip designer, specializing in data processing semiconductors. The stock is strong today following a series of analyst upgrades after the company’s latest investor day presentation in which management guided for significant revenue and earnings growth. Marvell increased its long-term annual growth rate forecast to between 15% and 20%—one of the highest rates among large-cap chip companies—and also expects higher gross margins and slightly lower operating expenses over the long term. The company has been on an acquisition spree of late, including two purchases this year; cloud networking company Innovium and semiconductor component maker Inphi. Both acquisitions are expected to allow Marvell to benefit from accelerating cloud adoption and data centers. On the cloud front, Marvell sees “significant” growth opportunities from cloud-optimized solutions and expects robust Q3 sequential sales growth from strong data center demand (which accounts for roughly 40% of its revenue and its second-biggest business), thanks to a sizable increase in the addressable market for data center switches. Meanwhile, Marvell anticipates an “incremental multi-billion-dollar opportunity” in the connected vehicle market. It also sees auto as its fastest-growing market opportunity and projects auto segment revenue to expand by seven times in fiscal 2022 (ending in January) versus two years prior. All in all, analysts see this year’s earnings up 57%, with another 34% gain next year, and the top brass’ long-term bullish outlook has big investors thinking more big gains are in store after that. Earnings are likely out in early December.” BUY

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has not yet broken out above its January high of 88, but it’s close. In his latest update, Tom wrote, “It’s tough to figure out this regulated/alternative utility stock recently. It just sort of bounces around like a high-quality utility stock, going in and out of favor. But it used to be more and will be again. It should mainly be a fantastic way for conservative investors to play the growth in clean energy. But investors seem to have forgotten all about clean energy for the time being as conventional energy has gotten red hot in the recovery. But NEE should be back to its old ways when the market normalizes.” As discussed in the intro above, NEE is now rated sell, because something in the portfolio has to go. The stock has made no progress this year, and it’s possible the big picture is changing. But if you’re happy with the stock and the dividends, holding may still work out fine for you. SELL

Sea Limited (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, hit a record high three weeks ago, pulled back to its 25-day moving average, and is now on course to return to that high and almost certainly break through it. In his update last week, Carl wrote, “SE shares are up 77% this year—and more than 1,000% in the last two years! The company expects that its e-commerce revenue will grow 121% in 2021. Sea’s aspirations are increasingly centered around its global e-commerce arm Shopee’s 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 an incremental 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, “Sensata shares have about 30% upside to our 75 price target.” BUY

Signet Jewelers (SIG), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here four weeks ago, has been acting just the way a momentum stock should act, hitting new highs frequently. 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 two 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—and the stock is strong. 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 has had a low-volume rally to new recovery highs in recent weeks, but there’s still overhead to chew through and earnings out in early December. We like it but want to see a better setup.” I’ll downgrade to Hold in recognition of the potential for correction from here. HOLD

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, seems to be in the news every day, for better or worse—and that’s an achievement for a company that does no advertising! Elon Musk is the richest man in the world, mainly because of his stake in the company, whose stock has doubled since June. The company is expanding as fast as possible, but still cannot meet demand for its cars, so has been raising prices. And competitors, from old-timers like Ford and GM to upstarts like Rivian and Lucid (which also have sky-high valuations) are all playing catch-up. Short-term, the stock is now likely to cool off—perhaps for a very long time. (After AMZN peaked in late 1999 near the end of the dot-com boom, it took 10 years—and a drop in value of more than 90%—before the stock could move out to new highs.) So partial profit-taking should be considered here. But long-term, I remain very bullish on the company, in part because of the potential of the firm’s energy business (energy is an even bigger industry than the automobile industry). HOLD

U.S. Bancorp (USB), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, hit a new high last week and has pulled back normally since. In his latest update, Tom wrote, “The regional bank stock had a nice move between the middle of September and mid-October. But it has since 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.” BUY

Veeco Instruments (VECO), recommended by Carl Delfeld in Cabot Early Opportunities, gapped up big last week after releasing an excellent third-quarter report. In his update last week, Carl wrote, “VECO came out with quarterly earnings of $0.40 per share, beating expectations of $0.35 per share. Revenue growth for 2021 may be up 30% and earnings growth may be even better. Veeco represents a backdoor play on semiconductors. I recommend that you acquire shares if you have not already done so.” BUY

The next Cabot Stock of the Week issue will be published on November 15, 2021.

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