March 13, 2020

UPDATE ON THE ECONOMY AND STOCK MARKET

Adobe Systems (ADBE) reported first quarter results yesterday afternoon (November year end). Record revenue of $3.09 billion edged above the $3.04 billion consensus estimate. Non-GAAP earnings per share (EPS) of $2.27 were impacted by COVID-19 virus-related expenses because the company canceled their Adobe Summit event. Nevertheless, the company still exceeded the consensus estimate of $2.23, coming in near the top of the estimate range.

Adobe Systems is a software company that’s changing the world as an innovative leader in digital media and digital marketing. From the press release:

• Digital Media segment revenue was $2.17 billion, which represents 22 percent year-over-year growth.
• Digital Media Annualized Recurring Revenue (“ARR”) grew to $8.73 billion exiting the quarter, a quarter-over-quarter increase of $400 million.
• Creative revenue grew to $1.82 billion.
• Creative ARR grew to $7.58 billion.
• Document Cloud revenue was $351 million.
• Document Cloud ARR grew to $1.15 billion.
• Digital Experience segment revenue was $858 million, representing 15 percent year-over-year growth.

Wall Street was especially pleased with ARR and margin growth in Digital Media.
The company repurchased 2.4 million shares during the quarter.

Management is guiding Wall Street to $3.175 billion revenue and $2.35 EPS in the second quarter vs. the consensus estimates of $3.22 billion and $2.33 EPS. This forecast includes their best assessment of how business is being impacted by the commerce disruption from COVID-19.

ADBE is a large-cap aggressive growth stock. Prior to this first quarter report, analysts expected EPS to increase by 24.8% and 18.5% in 2020 and 2021, respectively. The 2020 P/E is 31.6. At least nine Wall Street analysts changed their price targets on ADBE to a range of 293-375 this morning, with the majority of those targets landing around 325 and 370. The only rating change I saw was from JPMorgan, who raised their recommendation from neutral to overweight.

The stock rose to a new all-time high in February, fell with the market, and is now climbing again. I’m moving my recommendation on ADBE from Hold to a Buy recommendation. I love the company and prospects for the stock. If we’re going to buy low during a stock market correction, ADBE has a better price chart than most stocks right now, and will therefore likely recover sooner than the broader market. Buy.

Broadcom (AVGO – yield 6.4%) reported first quarter results yesterday afternoon (November year end). Revenue of $5.858 billion slightly missed the $6.0 billion estimate. Earnings per share were $5.25, missing the $5.33 consensus estimate, but well within the analysts’ range of $4.71-$6.16. Refer to the press release to review additional balance sheet items.

CEO Hock Tan commented, “The fundamental semiconductor backdrop has been improving, and we did not see any material impact on our businesses due to COVID-19 in our first quarter. However, visibility in our global markets is lacking and demand uncertainty is intensifying. As a result, we believe it prudent to withdraw our annual guidance until visibility returns to pre COVID-19 levels.” Second quarter revenue is now expected to be approximately $5.7 billion vs the previous consensus estimate of $5.9 billion.

CFO Tom Krause commented, “We generated over $2.2 billion in free cash flow in the quarter, which represented 9% growth on a year on year basis. We ended the first quarter with over $6.4 billion of cash on hand and our cash flow outlook remains healthy. As a result, we are well positioned to continue to support our dividends to stockholders despite the challenging market backdrop.”

Broadcom is a global technology leader that designs, develops and supplies semiconductor and infrastructure software solutions that serve the world’s most successful companies. Full year profits were recently expected to grow 9% to 10% per year in 2020 and 2021 (November year end). We’ll have updated estimates in the coming weeks. Thirteen Wall Street firms cuts their price targets on AVGO to a range of 230-350 today, with ten of those targets at 300 and higher.

While I would not normally recommend that an investor buy a stock with a share price that plummeted as AVGO did (see price chart, above), the caveat is this: If the stock pays a safe dividend, and the dividend yield is large, investors have an unusual opportunity to lock in a big yield while the share price is low. In that light, I’m moving AVGO from Hold to a Buy recommendation. Income investors should buy now, as should patient growth and income investors. Traders and pure growth investors should wait until the price chart becomes more bullish. Buy.

Upcoming webinar — 7 Undervalued Growth Stocks with Rising Dividends for This Market. Tune in to my upcoming free webinar on March 18 at 2 PM ET. Click the link and sign up to attend! I’ll be giving investors some new ideas on dividend-paying growth stocks. I’ll also let you know which Movie Star Stocks seem to have the best chances of leading the market’s eventual recovery. (Those might be stocks like Apple and Disney and Microsoft – stocks that people love to hear about and own!)

The best way to ask me to comment on a specific stock during the webinar is to send me that request via email in advance: crista@cabotwealth.com. I will be able to research your request, and not just give you a vague answer on the fly!

Portfolio Strategy — As you pour over stock websites and ponder which stocks you might like to buy in the coming weeks, think hard about how badly these companies might be harmed by the cessation of public gatherings. For example, an airline is going to be seriously impacted, while a company that provides a service through your computer or TV – such as Adobe Systems (ADBE) or Netflix (NFLX) – will not likely be greatly harmed.

It will be all right to consider energy companies after oil prices stabilize, and the companies tell us how their bottom lines have been impacted. The same holds true for airlines, hotels and other companies that supervise large gatherings of people.

If you’re fully invested, and looking to tweak your portfolio a little bit more, consider moving one position into a better position, based on the companies’ balance sheet qualities or based on the bearishness vs. bullishness of their price charts. Sell a low-dividend stock that is trading at a six-month low (and possibly still falling), and move that cash into a high-quality growth stock that did not fall nearly as much, or a high-quality growth & income stock with a large dividend yield. When the stock market begins to recover, your portfolio will likely be better able to deliver capital gains and/or dividend income.