October 4, 2021

The market weakness has been spreading in recent weeks, and as a result, we have three sell recommendations in today’s issue, as well as three downgrades to Hold.

As for the new recommendation, it’s a major retailer with a stable of familiar names that has transitioned its business very successfully through the pandemic, and it pays a nice dividend!

Details inside.

Cabot Stock of the Week 368

The major indexes have trended down over the past month, as the chorus of worries about over-regulation in China and inflation here in the U.S. has grown. Thus, short-term trends can be viewed as weakening—or even negative. But the long-term trend of the market remains positive, so I continue to recommend that you be heavily invested in a portfolio that meets your investment needs. Today’s recommendation is an established retailer with a stable of familiar names—and it pays a dividend! The stock was originally recommended by Mike Cintolo in Cabot Top Ten Trader and here are Mike’s latest thoughts.

Signet Jewelers (SIG)
Not a lot of themes have worked consistently in 2021, with money sloshing back and forth between sectors and areas based on the news of the day. But one group that has generally been in favor are big, old-school companies that adjusted due to the pandemic, and now, as the world slowly turns right side up, continue to thrive, seeing earnings crush expectations quarter after quarter. In many cases, these outfits are seeing their bottom line take a step function higher.

Signet Jewelers fits right into this category: It’s the largest retailer of diamond jewelry in the world and the largest specialty jewelry retailer in the U.S., U.K. and Canada under the brands Kay Jewelers, Zales, Jared, Ernest Jones and more; all told, the firm operates around 2,800 stores. Historically, Signet has always been a nice, solidly profitable company (even last year it earned $2.15 per share), though earnings have been generally slipping in recent years as margins shrank.

But now Signet looks like an entirely different outfit, thanks in large part to its embrace of all things digital. The investment in digital began more than three years ago, but it’s just started to bear fruit in recent quarters; the company offers its customers more of a “connected commerce” experience (buying when, where and from whatever device they want), and it’s made big improvements in its data-driven marketing, allowing it to more efficiently target consumers’ needs. (Some interesting nuggets: Signet expects 2.3 million marriages this year, up in the high-single-digits from a normal pre-pandemic year, with 30% of customers buying their engagement rings online, up from 15% in 2019. Signet’s bridal-related sales rose 25% in Q2 from two years ago.) The company has also used technology to simply get more efficient, with a 40% improvement to inventory turns during the past couple of years.

And now the results are showing up in an eye-popping way. Compared to the pre-pandemic second quarter of 2019, sales rose a solid 31%, same-store sales were up 38% from two years ago and e-commerce sales rose 114% (and were up 25% from last year, when online sales first began to boom). Interestingly, foot traffic to Signet’s retail stores is down, but conversions, average transaction values and (obviously) e-commerce more than picked up the slack.

Even better is that the sales are falling to the bottom line; gross margins came in at 40%, which is up from 33.5% two years ago, and operating margins did the same. Part of the reason is what sounds like an advanced store measurement system where underperforming locations are seeing hours cut. The result is a huge 70% improvement in sales per labor hour in Q2. And this could be just the tip of the iceberg: One analyst thinks in-store profit margins could nearly double from pre-virus levels (5.2%) to double digits, and while the near-term could be slightly crimped from supply chain issues, Wall Street is growing increasingly positive that most of this year’s massive earnings bump will stick.

Indeed, earnings came in at $3.23, $3.81 and $2.15 per share for 2018 through 2020, but analysts see the bottom line coming in at $9.35 per share this year (!) and remaining at nearly $8 in 2022—both of which will almost surely prove conservative as Signet has been crushing estimates by wide margins each quarter. A modest dividend (0.9% annual yield) and solid share buyback ($225 million, about 5% of the market cap) put a nice bow on the fundamentals.

As for the chart, SIG has come back from the dead since the crash a year and a half ago, motoring as high as 66 in March before starting an up-and-down period; in late August, the stock was still hovering around the low 60s. But it looks like the buyers are back in control, with a great late-August pop and a tight consolidation in September despite a rough market.

Current Recommendations

As technology stocks have cycled up and down in recent months, we’ve kept the portfolio healthy by continually selling our weakest stocks (usually one or two at a time) and replacing them with stronger stocks—always one at a time. But this week the weakness has deepened and broadened, with the result that we have three Sell recommendations and three more downgrades to Hold. If all is well, this weakness will pass, and the portfolio will soon fill up again, but I can’t help remembering that October is often a painful month for the market, so I’m being very conscientious about keeping losses small. Details below.

Changes
ASML Holding (ASML) to Sell
ChargePoint (CHPT) to Sell
Floor & Décor (FND) to Hold
Global-E Online (GLBE) to Hold
Nvidia (NVDA) to Sell
Sea, Ltd. (SE) to Hold

Ambarella (AMBA), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here two weeks ago, makes state-of-the-art computer vision chips that are in great demand by intelligent vision systems. In Cabot Growth Investor last week, Mike wrote, “AMBA has taken some lumps, but in the context of its recent move the dip has been totally normal—and on light volume, too. We think the company has something special going on with its computer vision chips.” Also, in Cabot Top Ten Trader, he updated his recommendation, writing, “AMBA isn’t near a great entry point yet, but we’re flagging it because its action is impressive—yes, it’s taken a hit this week, but all selling volume has been light, the dip is tiny compared to the prior upmove, and AMBA remains well above all its moving averages (25-day line is down near 143). If it can hold above 150 for a bit longer, it could be worth a nibble with a stop near the earnings gap (130).” BUY

ASML Holding (ASML), originally recommended by Mike Cintolo in Cabot Growth Investor, gapped down through its 50-day moving average last Tuesday and has continued lower every day since, telling us this once-hot stock is in for a cooling off phase. And that means it’s time to exit, while we still have a small profit. SELL

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is on a normal correction, still unable to break above resistance at 500. In his update last week, Tom wrote, “The current high-inflation and rising-rate environment is not good for technology stocks. AVGO had been behaving better than the overall sector after great earnings that beat expectations. But it is unlikely to go anywhere in the midst of a technology sector selloff which may not be over. But I believe in Broadcom. When we get out of the current weak patch, the stock should benefit from the 5G rollout while it’s also built for long-term growth.” BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, tagged its 200-day moving average two weeks ago and has been trending up since, aiming for its old high of 58. In his update last week, Tom wrote, “Everything looks good for this infrastructure partnership. Business is solid and getting better as the recent Inter Pipeline acquisition should take earnings growth to a higher level over the next year. But the stock continues to trend very slowly higher in an up-and-down fashion.” HOLD

ChargePoint (CHPT), originally recommended by Carl Delfeld in Cabot Explorer, is a small company with promising fundamentals; it’s the leading provider of public car charging stations in the U.S. But the stock has now broken down through support at 20, and there’s no support visible until 13. Additionally, this is now the portfolio’s biggest loser, so selling is a no-brainer. Maybe we’ll come back to it someday. SELL

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, has pulled back to support at 55, which is probably a good entry point. In his latest update, Bruce wrote, “CSCO shares have about 8% upside to our 60 price target. The shares trade at 16.2x estimated FY2022 earnings of $3.43 (unchanged in the past week). On FY2023 earnings (which ends in July 2023) of $3.68 (unchanged), the shares trade at 15.1x. On an EV/EBITDA basis on FY2022 estimates, the shares trade at a 11.6x multiple. CSCO shares offer a 2.7% dividend yield. We continue to like Cisco.” BUY

ConocoPhillips (COP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Buy Low Opportunities Portfolio, and featured here last week, is the world’s largest independent E&P company, with about two-thirds of its production in the U.S. In his latest update, Bruce wrote, “We like Conoco’s low valuation at about 5x EV/EBITDAX. It also offers a free cash flow yield of close to 12%²– an indicator of the company’s strong cash production as well as its discounted price. Most analysts have oil prices of perhaps $55-$60/barrel in their earnings estimates, implying that profits and cash flow will be stronger than estimated, as oil has traded close to $70/barrel for most of the year so far. We are placing an 80 price target on ConocoPhillips shares. The shares have jumped some on the Texas acquisition news, so investors may want to buy a partial position now, then wait for any pullbacks.” BUY

Dexcom (DXCM), originally recommended by Mike Cintolo in Cabot Growth Investor, is a leading maker of diabetes monitoring and controlling tools and the stock has been very strong for months, but the past two weeks have brought a correction that’s brought the stock down to its 50-day moving average—twice. In his update last week, Mike wrote, “DXCM dipped straight down to its 50-day line…and found support where it “should.” Given the advance since May and the market environment, further weakness/rest is possible, but there’s little doubt the growth story is set to accelerate in the quarters ahead as the G7 hits the market. Combined with the fresh breakout on July 30, higher prices are likely down the road.” BUY

Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, broke below its 50-day moving average last week and continued lower today. In his update last week, Mike wrote, “FND has been selling off with the market, and it actually nosed below its 50-day line mid-day. But, at the risk of being complacent, we’re going to stay on Buy—the decline has come on very light volume and the stock remains well above its lows of July (102) and August (111). Of course, rising interest rates (never a good thing for construction-related issues) could be a bugaboo here, but stepping back, we think the uptrend in the stock and the overall story is still intact.” Since then, the stock is even lower, and volume has been rising, so selling is a possibility (while we still have a profit). But the stock is still above the previous lows Mike mentioned, so I’ll stick with it—though I will downgrade it to hold. HOLD

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, gapped up this morning on the news that activist investor Engine No 1, the hedge fund that successfully pushed for board changes at Exxon, also has a stake in GM and believes it will thrive as the industry transitions to electric cars. And this follows news about Polestar, which will merge with a SPAC to become a public company, and Volvo, which owns part of Polestar and will also go public, and Tesla, which released a great third-quarter delivery report on Saturday. In his latest update, Bruce wrote, “Swedish electric-car maker Polestar announced that it will merge with a SPAC and thus become a publicly traded company. The company is a highly credible competitor to Tesla, GM and other EV producers. With its implied enterprise value of around $20 billion, it provides valuation support for GM’s electric vehicle operations. GM will update investors at its October 6-7 Analyst Day – we hope to get a lot more color on its EV rollout to better assess its positioning relative to Polestar and others. Readers interested in Polestar will want to check out its exceptionally impressive website. (If its cars are anywhere near as good as its website implies, Polestar will do quite well!)

“We don’t expect GM shares to fully incorporate a comparable valuation of its EV operations relative to Polestar, Tesla, or others. Shares of these other pure-play EV companies have an investor constituency that is very different from GM’s, as these other stocks can become volatile and speculative ‘bets’ whereas GM won’t likely meet those criteria. GM shares have 30% upside to our 69 price target.” HOLD

Global-E Online (GLBE), originally recommended by Tyler Laundon in Cabot Early Opportunities, is growing fast in the world of direct-to-consumer cross-border e-commerce software, but the young stock has lost a bit of power in the past month, so I’m going to downgrade it to hold. HOLD

HubSpot (HUBS), originally recommended by Tyler Laundon in Cabot Early Opportunities and then by Mike Cintolo in Cabot Top Ten Trader, hit a record high two weeks ago and has pulled back normally since. HOLD

Marvell Technology (MRVL), originally recommended by Carl Delfeld in Cabot Explorer, came very close to hitting a new high two weeks ago, but today it looks like so many other tech stocks, falling deeper below its 50-day moving average. But Carl isn’t worried. In his latest update, he wrote, “Shares have lost a bit of momentum over the last few weeks though the company is getting a lot of press as an inexpensive semiconductor idea. The key question is when will its recent acquisitions pay off. Marvell earnings in its recent quarter jumped 62% while sales surged 48%. The stock is up about 45% since May, 2021. Credit Suisse 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 at current prices if you have not already done so.” BUY

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, bounced off its 200-day moving average last week and is up since then. In his latest update, Tom wrote, “This regulated/alternative utility used to be a superstar stock that investors loved to buy as a conservative way to play the growth in clean energy. But it’s just been a utility stock this year. It rallies when cyclical stocks struggle and falls when cyclical stocks go higher. That’s okay. A defensive cyclical alternative rounds out the portfolio. But NEE is much more than this. Eventually, alternative energy will come back in favor and NEE will benefit.” BUY

Nvidia (NVDA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, fell below its 50-day moving average last week, tripping Mike’s stop, so he advised selling, and that’s what I’ll do too—taking a nice profit. Certainly, holding might bring larger long-term profits, but Cabot Top Ten Trader is a momentum-based advisory, always looking to own the strongest stocks. SELL

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, has pulled back to its 50-day moving average, but it hasn’t really fallen through it, which is a good sign. In his update last week, Carl wrote, “Shares were down this week after it was reported that Ark Invest sold some its holdings in Sea. The company expects that its e-commerce revenue will grow 121% in 2021. I would be an incremental buyer of this stock but long-time holders should definitely take partial profits from time to time.” Given the broad weakening of technology stocks, I’m going to downgrade it to Hold. 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 traded in a range between 55 and 60. In his update last week, Bruce wrote, “ST 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%. Investors undervalue Sensata’s durable franchise. Its sensors are typically critical components that generally produce high profit margins. ST shares have about 33% upside to our 75 price target. The stock trades at 13.5x estimated 2022 earnings of $4.14 (down 2 cents this past week) and 12.2x estimated 2023 earnings of $4.63 (up 2%). We expect this 2023 estimate will move around a lot. On an EV/EBITDA basis, ST trades at 11.1x estimated 2022 EBITDA.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, exceeded all expectations when it reported third-quarter delivery results on Saturday. Deliveries topped 240,000 vehicles, up 70% from the year before, while analysts were expecting 225,000 to 230,000. And that was in the midst of a global chip shortage that forced other manufacturers to cut production! In response, the stock climbed up above 800 this morning, into territory it hadn’t seen since February. Fundamentally, all is well here (aside from the chip shortage) but technically, I think the stock needs a rest. HOLD

U.S. Bancorp (USB), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, was recommended two weeks ago as it bounced near its 200-day moving average, and since then the stock has climbed back to near its old high of 62. In his update last week, Tom wrote, “Most businesses hate higher interest rates, but not regional banks. For them, higher interest rates mean higher profits as loan spreads increase net interest income. That’s why USB has been moving higher despite the crummy market. As I mentioned in the last monthly issue, rates are likely to trend higher. The recent move is probably just the beginning.” BUY

The next Cabot Stock of the Week issue will be published on October 11, 2021.

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