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Thank you for subscribing to the Cabot Undervalued Stocks Advisor . We hope you enjoy reading the July 2022 issue.

Investors are facing two forecasts that wouldn’t seem to be possible at the same time: pending recession and stable/rising earnings estimates. We look at how our cyclical stocks have been beaten down even as their earnings estimates remain largely steady.



It has been a quiet month for new recommendations and ratings changes as we patiently wait for great opportunities.



Please feel free to send me your questions and comments. This newsletter is written for you and the best way to get more out of the letter is to let me know what you are looking for.



I’m best reachable at Bruce@CabotWealth.com. I’ll do my best to respond as quickly as possible.



Thanks!

Current Market Outlook


Despite today’s rally, the major indexes have basically been in a sideways trend during the past few months—they’ve tried to get going on the upside twice during the past few weeks, but both times hit a wall and fell back. Now, a sideways trend isn’t a death knell for the market, but it does make it more difficult—it’s vital to pick your spots when buying, to book partial profits on the way up and to honor your stops should a stock break down. We’re going to knock down our Market Monitor a bit—we’re still more bullish than bearish, but given the environment, we want to lighten up on the gas pedal a bit.

This week’s list has a few dependable growers, not surprising given the market’s wobbles. Still, for our Top Pick, we’re going with a faster mover—Ctrip.com (CTRP) recently gapped up on earnings after 18 months out of the spotlight, thanks to a bullish forecast. We think you can start a position around here.

Stock Name	Price	Buy Range	Loss Limit
VeriSign (VRSN)	190.71	63-65	59-60
Twitter (TWTR)	40.37	47.5-50.5	44-45
Signet Jewelers (SIG)	0.00	132.5-136.5	126-127
ServiceMaster (SERV)	0.00	32-34	29.5-30.5
Red Hat (RHT)	0.00	75-77	68-70
Novo Nordisk (NVO)	0.00	52-54.5	47-48
Molina Healthcare (MOH)	0.00	63-65	59-60
Huntington Ingalls (HII)	0.00	135-140	127-129
Ctrip.com International Ltd. (CTRP)	34.94	56-58	51-53
Abiomed (ABMD)	0.00	70-73	64-66

Current Market Outlook


It’s not perfect, but from a top-down perspective, the market remains in good shape—today’s stretch toward new highs for many indexes (the S&P 500 made it, though most others didn’t) keeps the intermediate- and longer-term trends pointed up. That said, under the surface, things are a bit disjointed, with selling on strength seen in some extended growth leaders and buying picking up in names that are either cyclical (oils, financials) or fresher (those that haven’t had huge runs). That doesn’t mean you should chase every stock and sector that’s moving and ditch those that are wobbling, but it is important to avoid complacency with your winners (honor stops and take partial profits when offered) and, on the buy side, focus on stocks showing outstanding accumulation in recent weeks.
Those are just the type of charts we’re honing in on these days, and this week’s list has another batch of (mostly) newer names showing excellent action. Our Top Pick is Anaplan (PLAN), which looks like a new leader in the software space.

Stock Name	Price	Buy Range	Loss Limit
AGCO Corporation (AGCO)	76.24	75.5-78	69-70.5
Anaplan (PLAN)	47.52	47.5-50.5	42-43.5
eHealth (EHTH)	122.74	80-84	71-73
Inphi (IPHI)	120.16	51.5-53.5	46-47.5
Kratos Defense (KTOS)	24.08	21-23	18.8-19.8
Novocure (NVCR)	0.00	58-61	51.5-53.5
Roku, Inc. (ROKU)	150.46	88-92.5	77-80
Shake Shack (SHAK)	92.08	66-68	61-62
Smartsheet (SMAR)	44.12	47-49.5	42-43.5
Snap Inc. (SNAP)	16.68	13.7-14.7	12.2-12.6

Current Market Outlook


The market and many growth stocks had a solid three-day rally in the middle of last week, but the intermediate-term trend never turned up and the past couple of days tell us the sellers are still active—all major indexes we track are below their 50-day moving averages, with some (like the S&P 600 SmallCap) dipping to new correction lows. Stepping back, the longer-term trends are still positive, and the relatively resilient trading of many leading stocks is also a plus. But with the intermediate-term trend down and with the market having just enjoyed four months up without any pullback, it’s best to practice some caution—limiting new buying, not letting losses getting away from you and holding some cash makes sense. It wouldn’t take all that much strength to produce a new green light, and when one comes, we’ll adjust. But the evidence remains iffy here, and we think you should respect that.

Encouragingly, for the second straight week, the list is heavy on growth-oriented ideas that have held up pretty well. Our Top Pick, though, is Blackstone (BX), the huge Bull Market stock that’s benefiting from a company-specific change and the overall longer-term uptrend in asset values.

Stock Name	Price	Buy Range	Loss Limit
AAXN (AAXN)	87.11	61.5-64	56-58
Blackstone Group (BX)	49.12	39-40.5	36-37
Insulet (PODD)	175.69	100.5-104	93-95
Lending Tree (TREE)	411.51	375-395	345-355
Mercury Systems Inc. (MRCY)	68.92	70.5-73	64.5-66
Paylocity (PCTY)	97.34	96-99	88-90
SolarEdge Technologies Inc. (SEDG)	124.37	51-53.5	46-48
Twilio (TWLO)	183.39	134-138	122-125
Zoom Communications (ZM)	155.83	82-87	67-70
Zscaler (ZS)	126.22	74-77	66-68

The smooth uptrend of the past four months has run into a trade war roadblock this week, with the major indexes and many stocks taking hits as tariffs look set to rise. Our Cabot Tides are now on the fence, and while we have no changes tonight, we are holding 20% in cash and have at least one name on a tight leash.
We’ll go with whatever happens from here—should this turn into a short-term shakeout, we’ll hold our stocks and could even do some buying. But should the Tides and/or a stock or two crack, we’ll do some work on the sell side.

Current Market Outlook


We’re still of the mind that going slow makes sense—following the vicious rotation of the past week or two, there’s still a chance of continued crosscurrents going forward, especially with the weekend news in Saudi Arabia and the usual batch of uncertainties that are out there (Fed this week, U.S.-China trade, etc.). But at the end of the day, most of the evidence out there is tilted to the bull case: The intermediate- and longer-term trends of the major indexes are up, the broad market is very strong (very few stocks hitting new lows every day) and, while leadership has definitely shifted, we’re seeing a good number of stocks and sectors that are under strong accumulation. We still favor starting with smaller-than-normal positions and holding some cash, but we also wouldn’t be in your storm cellar as the buyers are (mostly) in control.
This week’s list features stocks where the buying has been concentrated of late—and these aren’t beaten-down names, as many are at or near new-high ground. Our Top Pick is Floor & Décor (FND), a mid-sized building-related retailer that has tightened up nicely.

Stock Name	Price	Buy Range	Loss Limit
ACADIA Pharmaceuticals (ACAD)	47.84	42-44	34-35
Arconic (ARNC)	17.00	26.5-27.5	24.5-25
Elastic (ESTC)	86.17	90-93	82-84
Floor & Décor (FND)	68.03	48-50	44-45
Lam Research (LRCX)	268.47	227-232	207-210
Medpace (MEDP)	76.28	81-83.5	73-75
Micron Technology, Inc. (MU)	43.31	48-50	44-45
Shake Shack (SHAK)	92.08	95-98	85-87
Teladoc, Inc. (TDOC)	127.95	67-69	60-62
Teradyne (TER)	82.83	56-58	51-52

Politicians in Washington, D.C. let cannabis investors down once again.

Commentary from lobbyists and Senators had suggested the Senate banking committee might make progress on cannabis sector banking reform (allowing banks to work with companies) in late July.

That turned out not to be the case. I cautioned at the time that a risk here is that the actions of politicians are hard to predict. But it was worth having exposure, in case there actually was progress on so-called SAFE banking, which seemed possible at the time.

The overall market has started to pull back, and the encouraging news is that, from a top-down perspective, things are under control--our trend-following indicators are positive and the retreat to this point has shown little, if any, abnormal qualities. The problem, though, is growth stocks, as many of them haven’t just fallen, but decisively cracked their intermediate-term uptrends, often after quarterly results--that’s not something we can ignore, and so we’ve been selling and have quickly built up a big (50%-ish) cash position. Near-term, we expect this correction to go further, but the odds continue to favor a resumption of the bull trend once the selling finishes up.

In tonight’s issue, we write a lot about this earnings season and some slightly different tactics we may use going ahead, aiming to still give us long-term upside but better protect ourselves against trends that don’t persist. We also review a bunch of new names and offer plenty of commentary about the good, bad and ugly of the stocks we own and are watching.

A year from now we could be in a raging bull market or bounding toward a recession. Interest rates could be high or much lower. And we have to see what will happen with these wars and who will be elected president in November. Nobody knows the answers to these questions.

But a year from now there is at least one thing we can bank on: The population is already older than ever before in history and will continue to get still older at warp speed. Between 2011 and 2029, about 76 million boomers born in the U.S. between 1946 and 1964 will turn 65. That’s about 3.6 million per year. There will be tens of millions more older people running around in the years ahead.

The inescapable fact about older people is that they spend much more than any other segment of the population on healthcare. That’s just how we’re built. Boomers control about 70% of this nation’s wealth and the aging population has enormous implications for businesses and markets.

Certain healthcare companies and stocks are positioned ahead of a megatrend and a massive wave of spending. In this issue, I highlight two “BUY”-rated portfolio healthcare stocks. If you don’t own them already, they are well worth considering.

It’s been a great year in the market with the S&P up 27%. And there is good reason for optimism about 2025.

We are in a bull market that began in October of 2022. Bull markets don’t usually run out of gas after just two years, especially recent ones. The Fed has begun a rate-cutting cycle that is likely to last for the next two years. Plus, the economy is solid and expected to get stronger. Rate cuts in a strong economy are unusual, but the combination should be great for stocks.

One sector may have a better 2025 prognosis than the overall market: Financial stocks have been on a tear since the summer. The Financial Select Sector SPDR Fund (XLF) is up 33% YTD and 22% since early August. Despite the recent spike, many financial stocks are still cheap after a decade and a half of underperformance.

Financial stocks are dependent on yield spreads, economic growth, and relaxed regulations. All those areas are improving or expected to improve as a result of the election.

In this issue, I highlight one of the highest-growth companies in an industry that is on the rise. It is the leading all-digital bank in the country. Unlike many other industry-leading stocks, it is still well below the high because of a recent temporary stumble which has likely only delayed its price spike.

The market has steadily improved its standing since its low three weeks ago, so much so that our Cabot Tides and Two-Second Indicator have returned to bullish territory; that had us start putting money to work last week and we’re doing a bit more buying tonight. Granted, this isn’t the same environment as, say, last November, as buying pressures are still sporadic and growth stocks are good (not exceptional), so we’re moving in steps and want to be “pulled” into a heavily invested position via more strength.

In tonight’s issue, we review all of our stocks, especially our recent buys, and write about one growth area where it appears investor perception has changed for the better in a big, big way.

It’s another week of inflation data, Fed speak and interest rate angst, but you shouldn’t let any of it influence what stocks you’re buying and selling. Stock of the Week is a long-term stock portfolio, and one week of parsing CPI data and Jerome Powell’s words isn’t going to alter the trajectory of your best stocks. Meanwhile, the major indexes are at all-time highs, despite some under-the-surface churn. So today, we take a big swing in the form of a small-cap, Canadian-based rare earths company that’s been in Carl Delfeld’s Cabot Explorer portfolio for months.

Details inside.

From an intermediate-term perspective, the pieces continue to fall into place for the bulls--recently, our Two-Second Indicator has joined our trend-following indicator on the bullish side of the fence, while things like our Aggression Index and the trend in interest rates remain encouraging. Short-term, we are finally seeing some signs of churning in extended leaders, so we’re continuing to move gradually, picking our stocks and spots carefully. Last week, we did a little more buying in DUOL and started a position in ANET, and today we’re starting one more half-sized stake that will diversify the portfolio a bit.

Our national high-interest-rate nightmare is over, as the Fed has (finally) started slashing short-term rates in a big way, cutting by 50 basis points last week. The market likes the aggression, sending two of the three major indexes to new all-time highs. Is it the beginning of a new – and more egalitarian – leg of the bull market? Could be. Regardless, let’s strike while the iron is hot, adding shares of the leading company in one of the hottest new U.S. markets: sports betting. It’s a recent recommendation from Mike Cintolo in his Cabot Top Ten Trader advisory.

Details inside.

Clean energy is the future. But not for a while.

This country and the world still rely heavily on fossil fuels for more than 80% of energy needs, and these conventional energy sources will likely remain dominant for decades. Meanwhile, many stocks of companies that benefit have strong earnings and great value.

Fossil fuel proportions are expected to move toward natural gas in the years ahead. A recent study estimates that global natural gas demand will soar 34% between 2022 and 2050 with the strongest growth in the natural gas realm to be liquid natural gas (LNG), with demand expected to more than double in the same time frame.

In this issue, I highlight one of the best natural gas companies on the market. It is a newly formed company in the business of exporting abundant and cheap American natural gas overseas. It’s big business. In a short time, this company has become one of the world’s largest natural gas exporters.

It’s become a full-blown market correction. When will the selling stop? No one knows. But as always, when it does, there will be ample opportunities to make huge profits on the other end of it. In the meantime, we prune a few of our hardest-hit positions today and add a new position designed to capture growth in the fastest-rising economic power in the world, India. It’s a brand-new recommendation from Carl Delfeld in his Cabot Explorer advisory.

Details inside.

We’ve been around a while, but this is one of the most unusual environments we’ve seen, with today’s major rotational action another example of a pickup in volatility while few names are really making much sustained progress. Taking things on a stock-by-stock basis, we’ve pared back some in recent weeks, yet because most of the names we’ve been targeting for buying are just sitting there, has led to an increasing cash position--now up to 41% after a partial sale of Cava Group earlier this week.

The good news is that the mostly sideways action from much of the market has led to many setups heading into earnings season, which results in a straightforward game plan -- we’re holding our cash tonight, but we’re aiming to grab some fresh breakouts if they occur.

Outside of a few mega-cap names, the market remains stuck in neutral, with the vast majority of stocks (including growth stocks), sectors and indexes meandering sideways, resulting in plenty of trendless, tedious action. Of course, many areas are within shouting distance of new high ground, so we’re not negative--but while we’d love to put some money to work (a couple of names on our watch list are fairly enticing), we think less is essentially more, at least until the market shows its hand. We’re again standing pat tonight, though remaining flexible for what may come.

Long-term, the market’s picture remains bright, with our most reliable indicator (Cabot Trend Lines) firmly positive, which we write more about in today’s issue, as well as one name that’s probably at the very top of our watch list. All in all, we’re ready to make some moves, but right now, patience is the best course.

One down, one to go.

Cannabis stocks soared today (August 30) on news that Health and Human Services (HHS) recommends cannabis get downgraded to Schedule III under the Controlled Substances Act, from Schedule I.

I predicted this a few days ago on the Cabot website, and in my last Cabot Cannabis Investor update on August 9.

Stocks are coming off a rare down week, though the “damage” was mostly limited to last Thursday after a couple rogue Fed members came out with some hawkish quotes (though, in fairness, this happens just about every month). Still, the bull market is very much intact, and it’s a great time to go looking for growth stocks at value prices. As the new Chief Analyst of Cabot Value Investor, I just added such a stock to that portfolio, so today’s new Stock of the Week recommendation comes from yours truly. It’s a giant in the auto industry that is benefitting greatly from Americans’ burgeoning appetite for hybrid cars.