Cabot Stock of the Week Issue: April 15, 2024

For the first time since October, the market is in the midst of a real pullback. Blame the Fed, blame inflation, blame Iran – it doesn’t matter the reason. What matters is that stocks are encountering their first bout of real selling in nearly six months.

It’s not a bad thing.

No bull market is without its share of turbulence. During the halcyon days of 2020 (post-Covid crash) and 2021, when it seemed like stocks went nowhere but up for 20 months, there were actually five pullbacks in the S&P 500 of at least 3%, two of which were more than 5%. As of this writing, the S&P is down 3.4% in April, its first retreat of at least 3% since the bull rally began in earnest last November. So, this is normal. That doesn’t make it fun in the moment. But it does create some buying opportunities and allows us to purge some laggards to prepare our portfolio for the next upswing.

Today, we do both. We’re selling two stocks, but also adding a promising up-and-coming retail story that is a new favorite of Cabot Growth Investor Chief Analyst Mike Cintolo. It might start off wobbly in this increasingly volatile market, but the upside over the intermediate to longer term is undeniable.

Here are Mike’s latest thoughts on it.

Cava Group (CAVA)

Institutional investors are the ones that move markets and individual stocks and sectors over time, so a lot of what we do is identify fundamental characteristics (as well as chart clues) that entice the Fidelitys and T. Rowe Prices of the world to buy … and to keep building positions. For growth stocks, those characteristics are what we call the Three Rs—a long runway of rapid and reliable growth; it’s the combination of all three that can be like catnip for institutions.

When you think of things this way, it’s one reason why we’re frequently on the hunt for cookie-cutter stories—retail outfits that have a new, proven concept, and then generate a bunch of growth simply by copying the model into hundreds (if not thousands) of locations across the U.S. and elsewhere. It’s not as sexy as AI, chips and networking, but if you can find a special situation, the growth story can persist for years—think McDonald’s, Home Depot, Costco and, more recently, Chipotle.

From a big-picture perspective, that’s the main attraction with Cava Group, which certainly has the makings of a winner. The firm is another fast-casual player like Chipotle, but instead of Mexican food, Cava’s claim to fame is its Mediterranean fare, with bowls and wraps that can be stuffed with yummy seasoned chicken, feta cheese, hummus, tzatziki, lentils, falafel, pickled onions and many other proteins, grains, dips and spreads—and while the core of the menu is pretty much constant, there’s always innovation, including a steak offering that’s likely to be rolled out nationwide in the second half of this year.

It’s been a hit, and while the firm has been expanding for a while, it took a big step back in 2018 by acquiring Zoe’s Kitchen, which was another Mediterranean-focused player, and it’s spent the time since gradually converting those locations over to the Cava brand. At year’s end, that process had finally been completed, leaving the company with a total of 309 restaurants—but that’s just the beginning, with management expecting to grow the store base by 15%-plus annually for many years to come (including about 50 new openings this year), aiming for north of 1,000 locations early next decade.

Of course, the reason it can do this is solid store economics: While it’s hard to get a current figure, the firm’s overall model calls for a 35% cash return on the initial expenses in year two alone, with restaurant-level operating margins of 20%. And so far, everything appears to be on track, with Q4 restaurant-level margins near 25%, though to be fair, management does expect those to pull in some this year as it invests in building out the business.

Combine all of that with a solid base business—same-store sales in the Cava brand were up a whopping 11% in Q4 (more than 6% of that was from higher traffic, with the rest from higher prices), with the top brass guiding that figure to up 4% or so for all of 2024 (likely conservative)—and the bottom line (both for earnings and EBITDA) are in the black and Wall Street sees sales (up 20% or so) and earnings gliding higher from here.

There are more details, but that’s the big idea—if management can keep costs reasonable and the real estate team can find enough new places to open locations (again, at reasonable costs), there’s no reason Cava Group won’t get much bigger over time. And as mentioned above, institutions are attracted to what they see: The number of mutual funds that owned shares totaled 325 at the end of March (up from 223 six months before) and includes small positions from many top-notch funds. Expect to see more of that going ahead.

The stock came public less than a year ago, rallying for a few weeks before suffering the typical post-IPO droop. But CAVA got going in December and hasn’t stopped since, with big-volume buying after earnings in February/March and a couple of sharp shakeouts finding support near the 50-day line. Near term, the market will certainly have an impact here—a big selloff will probably drag everything lower—but you can start a position here, with plenty more growth potentially on the horizon.

Current Recommendations

Changes Since Last Week:
Dave & Buster’s (PLAY) Moves from Buy to Sell
PulteGroup, Inc. (PHM) Moves from Buy to Hold
Worthington Enterprises (WOR) Moves from Buy to Sell

Our spring cleaning continues, as we aim to cut our portfolio down to no more than 25 positions. We’re getting closer: today, both Dave & Buster’s (PLAY) and Worthington Enterprises (WOR) get the chop, as both have encountered some forceful selling as the market has gotten choppier in April. So, we’re now down to 27 stocks, with the addition of Cava Group (CAVA) – a restaurant chain that made Dave & Buster’s more expendable, despite a strong stint in our portfolio until recently.

Here’s what’s happening with the rest of our stocks.

Updates

Alexandria Real Estate Equities, Inc. (ARE), originally recommended by Tom Hutchinson in the Safe Income Tier of his Cabot Dividend Investor advisory, fell 4% last week after the CPI report came in “hot” and expectations of Fed rate cuts have been pushed back to September. That’s not good for any real estate company, including this life sciences REIT. But perhaps next Monday’s (April 22) earnings report can help the stock bounce back. Big things are expected: Analysts are looking for 10.9% revenue growth and 82% EPS growth. HOLD

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, broke below support in the mid-24s and dipped to 23, its lowest point since running up from 22 a month ago. There was no news, so this was likely some normal consolidation after a nice rally – and the down market hasn’t helped. Still, the trend is good, and retail sales remain solid. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, was down sharply this week, falling 7% on no news. Shares of the U.K.-based life insurance and investment management company had been hovering near 52-week highs for weeks after rallying from the mid-10s to the high 12s in February and March, but now they’ve broken down. They’re still trading above their 50- and 200-moving averages, however, and the stock now has 20% upside to our 14 price target. This could be a nice entry point for those who missed the previous rally. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down about 4%, which was no surprise given the down week for the market. BX is a classic “Bull Market Stock” (Mike’s term), which means it typically fares well – and, in fact, vastly outperforms – in bull markets. It’s still a bull market, but the current pullback is making for a bumpy ride. The company reports earnings this Thursday, April 18, so we’ll see whether that helps or adds to the bleeding. Keeping at Buy, but start small if you’re buying before the earnings report. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, bounced back nicely this week, going against the grain of the down market – a good sign. In his latest update, Tom wrote, “It’s back in business. The superstar AI beneficiary had flirted briefly with a pullback last month after earnings failed to blow people away. But it has quickly reversed course and made up most of the dip. The turnaround came after Broadcom announced it had secured a new, large customer for its AI chips. AI revenue quadrupled in the last quarter, and it is being speculated that the new customer is Amazon or Apple. The price has certainly stopped rising over the past month, but AVGO has established a pattern of once again moving to new levels after this kind of consolidation.” BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, was down a few points, but nothing major, and it seems to have found support in the 309-310 range. In his latest update, Mike wrote, “CrowdStrike (CRWD) has been gradually nosing lower on ever-lightening volume—it certainly has some flaws (living below its 50-day line for the past few sessions; cybersecurity group as a whole remains soft), but the correction seems reasonable to this point (excluding its wild post-earnings spike, the stock is off 11% from its peaks). More near-term weakness is possible, but having sold a small piece of our position a couple of weeks ago, we’re content to give CRWD time to gather strength for its next upmove, as the odds favor this leader has further to run when the market gets its act together.” BUY

Dave & Buster’s (PLAY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has totally broken down since missing earnings estimates two weeks ago, and it’s time to sell while we still have a small gain. Shares of the entertainment restaurant chain have fallen from 68 to 56 in less than two weeks and are now trading at their lowest point since early February. With a full portfolio, there’s no room for that kind of falling knife, despite the company’s potential as a retail turnaround story. So let’s get out now before it falls any further. MOVE FROM BUY TO SELL

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, seems to be stuck in a range between 44 and 47 this month. In his update last Thursday, Mike wrote, “DraftKings (DKNG) has been chopping up, down and all around during the past couple of weeks—but like so much else out there, the action has been tedious but not abnormal, with the stock holding its 50-day line and prior support. Helping the cause was one analyst who believes the firm is set to report a solid quarter, while the Masters tournament (the most important all year in golf) kicked off today and should attract its fair share of bettors. As for the stock, we’ll follow the plan here and remain on Buy as shares are still choppily uptrending—though much more weakness could change our thinking.” BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, has been chopping around the last couple months, with no real movement since mid-February after a big run-up. As Tom noted in his latest update, “LLY has leveled off for nearly two months but has done that several times over the last few years where it has precipitated another price surge. Lilly again killed on earnings and guided higher for 2024. The weight loss drug is a monster and looks like a mega-blockbuster and its Alzheimer’s drug should get the nod in the next few months.” Let’s trust that pattern – and the company’s upward trajectory thanks to Mounjaro – and keep it at Buy. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, was down sharply along with the rest of the cannabis sector, falling 12% since we last wrote. Such is the nature of the volatile cannabis sector, which is awaiting one of several major catalysts, namely rescheduling marijuana from a Class I to Class III drug. It could happen as early as later this month. All told, the damage has been fairly minimal, as Green Thumb now trades right where it was a month ago. Hang in there and wait for rescheduling news if you already own some; if you don’t, these dips have proven to be smart buying opportunities over the last six months. BUY

Honda Motor Co. (HMC), originally recommended by yours truly in the Growth & Income Portfolio of Cabot Value Investor, was down about 1.5% in its first week in the Stock of the Week portfolio. This is a play on the booming hybrid car market, which is benefitting Honda greatly – the Japanese automaker’s U.S. hybrid sales nearly tripled last year. More recently, Honda reported 17% growth in overall U.S. vehicle sales in the first quarter, fueled by a continued surge in hybrid sales. We won’t know the full results for this global automaker until the company reports earnings in a month (May 9). But the spike in U.S. sales is a good sign.

HMC shares trade at less than 8 times forward earnings and have a price-to-sales ratio of 0.47 and an EV/EBITDA of a microscopic 0.04. Shares have 24% upside to my 45 price target in Cabot Value Investor. BUY

International Business Machines (IBM), originally recommended by Carl Delfeld in Cabot Explorer, was down nearly 4% last week, likely in tandem with the market. There was no meaningful company-specific news. Earnings are due out April 24. The stock is still up 32% in the last six months but is currently trading at its lowest point since late February. As Carl noted in his latest update, “IBM is the world’s sixth-largest cloud infrastructure provider, and the company is a conservative play on cyber consulting and AI. The stock remains a long-term buy.” BUY

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was flat ahead of earnings this Thursday, April 18. Analysts are looking for 17.1% revenue growth with 14.6% EPS growth. The company has beaten earnings estimates in each of the last four quarters. Intuitive is a mega-cap biotech that is the maker of the da Vinci, a robotic surgery platform. And now it’s out with its latest version, the da Vinci 5, which has 10 times the computing power, better surgical precision and the option to use a host of proprietary, high-performance surgical tools that were previously provided by outside vendors. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, kept holding at 47. In his latest update, Tom wrote, “Although this newest portfolio addition is currently selling near the 52-week high, it is still reasonably priced at less than 1.6 times book value and with most other valuation measures below the five-year average. It also pays that safe and high dividend every single month with a strong possibility of supplemental dividends over the course of the year as well. MAIN should also provide strong total returns over time generated by its largely successful small business portfolio.” BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, mostly held firm, a good sign in the face of the fading market tide. Earnings are due out April 25. Given its leadership position in the artificial intelligence boom, this rejuvenated mega-cap tech titan is a must-own long-term holding for any portfolio. BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, was mostly flat ahead of earnings this Thursday, April 18. Analysts are anticipating 6.5% revenue growth with 47% EPS growth. The stock is up 26% year to date and 84% in the last year after firmly re-establishing itself as the king of streaming thanks to hit original shows like Squid Game, Love is Blind and, more recently, 3 Body Problem, plus popular syndicated shows like Suits (starring Meghan Markle). We’ll see if it can live up to lofty Q1 earnings estimates. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, has settled into a range between 124 and 127 this month. In his latest update, Carl, noted, “Novo Nordisk should make more progress this year in its core areas of diabetes and obesity care and is waiting for the approval of icodec, a potential once-weekly insulin product. The company remains a leader in the insulin market with a 40%-45% market share. There are an estimated 800 million people with obesity worldwide and only 2% of these patients are being treated.” The stock has more than doubled since we added it to the portfolio, but plenty of upside remains given the relentless demand for its Ozempic and Wegovy weight-loss drugs. You can still buy or add to your position if you haven’t already done so. BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down just over 3% after running into resistance above 65 again. In his latest update, Mike wrote, “Nutanix (NTNX) saw some high-volume selling today after it tried to hit new highs, which goes hand in hand with an iffy near-term market environment where big investors are very selective and, at times, are willing to book profits. A drop below 60 would be a yellow flag, though having already sold some, we’d likely give the stock some room to maneuver. Right now, we’ll stick with our Buy rating, and if the market can get moving, it certainly looks like NTNX is ready to do the same.” BUY

Palantir Technologies Inc. (PLTR), originally recommended by Mike Cintolo in Cabot Top Ten Trader, held support in the mid-22s. It’s been more than two months since this stock has done anything, so our patience is starting to wear thin. But given its leadership position as an AI platform provider, we will hang in there unless the stock breaks below 22. For now … BUY

PayPal (PYPL), originally recommended by Carl Delfeld in his Cabot Explorer advisory, dipped from 66 to just below 65 on no news. But, as Carl notes, PYPL shares were up 11% in March and yet still trade at 80% below their July 2021 peak. He adds, “I believe the stock is a great opportunity because it trades at a cheap forward price-to-earnings ratio of just over 12. Its payments volume increased 15% year over year in the fourth quarter of 2023 and 400 million-plus users leads to PayPal wallets being accepted by 80% of retailers in North America and Europe.” Earnings are due out April 30. BUY

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, is down about 9% in April after closing March at new all-time highs. The reason is obvious: the Fed. The pullback has prompted Mike to downgrade the stock to Hold, as he noted in his latest update: “PulteGroup (PHM) is being switched back to Hold, mostly because of interest rates—the intermediate-term trend of rates is firmly up, with Treasury yields hitting their highest levels since November, and that’s denting the homebuilders and PHM. Now, shares have held their 50-day line here, but we’re more looking at the overall view, with the latest push higher looking OK (not great) and then seeing that move given up right quick. Given what’s going on, then, we think moving to Hold and keeping a close eye on shares makes sense.” Let’s do the same. PHM is moving to Hold. MOVE FROM BUY TO HOLD

Qualcomm, Inc. (QCOM), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, held steady in the low 170s. In his latest issue, Tom did a deep dive on why he likes QCOM. Here’s what he wrote: “Qualcomm (QCOM) is the world’s largest supplier of chips for mobile devices. It also holds the patents for the key technology systems that are the backbone of all 3G and 4G networks. Chips account for roughly 75% of revenues while licensing from patents accounted for 25%.

“Qualcomm has an enormous advantage going for it right now. It is the undisputed king of chips for smartphones and ones that enable mobile 5G technology. Analysts estimate that the 5G chipset market will grow from $2.1 billion in 2020 to over $23 billion by 2026. That was a good track. Then the huge catalyst of AI emerged to power the potential earnings and stock upside far higher.

“The stock has strong momentum and has been up 60% since late October. But you probably haven’t missed the boat because QCOM still trades about 14% below the 2022 high.

“QCOM lagged the tech sector for much of the last two years. Device sales are cyclical and last year’s smartphone sales struggled because of excess inventory. Semiconductors are a cyclical industry subsector as well. But things are turning around. The Semiconductor Industry Association is forecasting 13% growth in worldwide chip sales this year after a decline of 8.2% last year.

“The first wave of AI beneficiaries has been mostly core companies associated with technology infrastructure, networking, and data centers. It was a similar thing with the internet. The first stocks to soar were internet providers and search engines. Then came companies like Amazon (AMZN) and Netflix (NFLX). The greatest opportunities are in the companies that are next to benefit.

“Mobile devices will ultimately deliver AI. Self-driving cars, robots, and the Internet of Things are about mobile devices. Qualcomm is the leader by far in AI for mobile devices. AI-enabled smartphone demand is forecasted to grow by an average of 83% annually through 2027. The stock is poised ahead of the next great wave.” BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, gave back its gains from the previous week, dipping back to 53 on market weakness. Carl calls the Singapore-based company a “better buy than Amazon stock today. Sea stock trades at just two times sales and has the potential to grow in the most dynamic markets in the world. For example, Sea in 2020 entered the Brazilian e-commerce market. This February, just four short years later, it had already opened its 10th distribution center in Brazil. Sea Limited generated a record-high $13 billion in total revenue during 2023, led by its e-commerce segment with revenue growth of 24%.” BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, was down sharply this week but remains in the same 740-to-780 range it’s been in for the last month. There was no news. The large-cap software stock reports earnings April 24. Perhaps that will break the stock out of its current range – one way or the other. A dip below 740 support may prompt us to reassess. For now, keeping at Buy. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down 4% this week and is back trading near one-month lows. Today’s news that the company plans to lay off 10% of its workforce was responsible for most of the losses, as it’s not a great look from an optics standpoint. For years, Tesla has been known for its relentless growth and industry-best margins, and both have been dented in the last year; now the company is contracting. Earnings are due out April 23, and a third straight quarter of disappointing results is expected. Deliveries were down 8.7% in the first quarter – the company’s first year-over-year decline since 2020. Nothing is going right for Tesla at the moment. But the stock hasn’t fallen much of late, which could mean the TSLA sellers have used up most of their ammo and the buyers could swoop in on any good news, which could happen next week if the earnings aren’t as bad as anticipated. Not a ringing endorsement, but given the stock’s history of bouncing back (not to mention our 9,000%-ish gain…), I’m optimistic the next 12 months will be better than the last 12. HOLD

Tripadvisor (TRIP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down another point, from 27 to 26. It’s still up 22% year to date and is holding right around two-month support. It could find new life as we approach summer travel season. However, don’t expect much movement until the company reports earnings the first week of May. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, held steady at 75, where it’s been for most of the last two weeks. In his latest update, Mike wrote, “Uber (UBER) remains in a relatively tight range here, holding its March lows and bouncing back a bit from Monday’s decline. Not to sound like a broken record, but our thoughts here haven’t changed—we’re open to anything, but the story, numbers and chart (tight rest period on very low volume after a huge upmove) tell us the odds favor the next big move being up.” BUY

Worthington Enterprises, Inc. (WOR), originally recommended by Bruce Kaser in the Buy Low Opportunities portfolio of the Cabot Value Investor advisory, has dipped below its 50-day moving average and hasn’t shown us much since we added it to the portfolio a little over a month ago. Selling after a month is a quick hook, but as I’ve said several times in recent weeks, we’re in spring-cleaning mode until we can get our bloated portfolio down to 25 stocks at most. While WOR remains in the Cabot Value Investor portfolio and could still be a solid long-term industrial play, the Stock of the Week portfolio simply doesn’t have the patience or the bandwidth for it any longer. MOVE FROM BUY TO SELL

If you have any questions, don’t hesitate to email me at chris@cabotwealth.com.

Here, too, is the latest episode of Cabot Street Check, the weekly podcast I host with my colleague Brad Simmerman.

The next Cabot Stock of the Week issue will be published on April 22, 2024.

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