Cabot Stock of the Week Issue: April 24, 2023

The market keeps chugging along, mostly unchanged though down slightly since we last wrote. It’s having to weather all the earnings chop, especially among mega-cap tech stocks and the banks, the latter of which have posted mixed but not alarming results in the wake of the SVB/Signature/Silvergate bank collapses in early March – which qualifies as a victory. All told, stocks have held up pretty well considering everything that’s being thrown at them right now.

So today, we’ll take another big swing in the form of a Chinese electric vehicle behemoth that is starting to give even our beloved Tesla (TSLA) (much more on them later) a run for its money. It’s a recent recommendation from Cabot Explorer Chief Analyst Carl Delfeld, and a household name in China … though perhaps not in the States.

Here it is, with Carl’s latest thoughts.

BYD Company Limited (BYDDY)

World electric vehicle (EV) sales will soar to about 73 million units in 2040, up from around two million in 2020, according to forecasts by Goldman Sachs.

The forecast goes on to project that the share of EVs among worldwide car sales should rise to 61% from 2% during that span. And the share of EV sales could be well over 80% in many developed countries.

In my opinion, the above is too optimistic – a best-case scenario.

A more important question for investors is which company and stock will lead the EV revolution going forward.

Tesla (TSLA) is still in the driver’s seat right now but China’s EV leader BYD (BYDDY) can be clearly seen approaching at high speeds in the rear-view mirror.

The market is fragmented and the competition keen with plenty of American, European, Chinese, and other Asian automakers in the hunt.

In 2022, China auto giant BYD (for Build Your Dreams) switched to producing only all-electric battery vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs).

BYD sold more than 1.85 million electric cars in 2022, including hybrids. In both 2021 and 2022, BYD more than tripled sales from the previous year. That’s hyper-growth and including hybrids, BYD has already surged past Tesla’s sales. Tesla unit sales came in at 1,313,851 for 2022, up 40%.

Most of BYD’s sales are still in China but it has a big international expansion underway, including in the U.S., Europe, and other Asian markets.

The company also manufactures and supplies EV batteries, including to Tesla, and makes its own chips. This is vertical integration that would make Henry Ford proud.

BYD is moving up the scale to more premium models and has begun deliveries in Malaysia and India and entered Japan’s market in February. That helped make for a very good first quarter: BYD delivered 548,000 BEVs and PHEVs, nearly double the amount from Q1 a year ago and way more than Tesla’s record 422,875 deliveries.

Its international expansion continues: BYD is building EV assembly plants in Thailand and Brazil. It is also planning at least one EV plant in Europe and is expected to announce plans for another EV plant in Asia in the next few months.

Further helping matters, the city of Shanghai is reintroducing a 10,000-yuan ($1,500) subsidy for residents who trade in vehicles in exchange for a purely electric vehicle. Shanghai is a big market for EVs, including BYD. For perspective, Shanghai has a population roughly equal to that of America’s four largest cities (New York, Los Angeles, Chicago, and Houston) plus Montreal and Toronto.

Despite such rampant growth, BYD stock trades at a mere 24.5 times forward earnings estimates, with a price to sales ratio of 1.31. The stock is up 17% year to date but still 30% below its July 2022 peak (82). This is a great time to buy a stock that not only looks like the next Tesla – it essentially already is China’s Tesla.

BYD is in a strong position to be one of, if not the, leaders of the EV revolution in terms of size, scale and growth.

Current Recommendations

Changes Since Last Week: SiTime (SITM) Moves from BUY to SELL

We will leave the final spot in our portfolio (20 stock cap) vacant for another week by selling SiTime (SITM), which has a promising story but has sunk like a stone since we added it a mere three weeks ago. That’s an unusually quick hook, to be sure, but SITM stands out like a sore thumb in a portfolio that’s otherwise littered with strong-looking stocks, despite the earnings decline in Tesla (TSLA) last week. So, we’re giving SITM the boot in the hopes that we can add a new stock next week without having to make any additional subtractions.

It’s a pivotal week for the rest of the portfolio, as six of our companies report earnings this week. Meanwhile, a couple others are touching 52-week or all-time highs.

Here’s what’s happening with all our stocks.

Updates

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, broke out of its weekslong 50-52 range – but in the wrong direction. Shares of CSCO plunged to 46 late last week apparently because of … Russian hackers? On Tuesday, the National Security Agency (NSA), the Cybersecurity and Infrastructure Security Agency (CISA), and the U.K. National Cyber Security Centre released a joint statement alleging that a state-sponsored hacking group sponsored by the Russian military had exploited a six-year-old vulnerability in Cisco’s routers for the purpose of deploying malware intended to spy on certain U.S. and European organizations. That’s not good publicity, hence the stock fall in the ensuing three days. But it doesn’t really change the overall story with Cisco. The share price, while damaged, is still above its 200-day moving average as of this writing (high 45s). In fact, with earnings coming up in mid-May – and double-digit revenue and EPS growth expected – one could view this as a buying opportunity, in keeping with Warren Buffett’s “buy bad news” credo. So, we’ll keep our Buy rating, for now. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, kept holding in the 37-38 range ahead of earnings this Thursday, April 27. Analysts aren’t expecting good things – a 5.4% decline in revenue, and a 4.7% dip in earnings per share. If the actual numbers can clear those low bars, it could be just the thing to prompt CSCO to break out of this narrow range – to the upside. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, just keeps rising, hitting new all-time highs above 380! Earnings are due out this Thursday, April 27, and double-digit top- and bottom-line losses are expected, so a pullback may be forthcoming. But Tom remains optimistic about the stock over the long haul, as he wrote in his latest update: “LLY was upgraded to a BUY early last month and has since moved about 19% higher. The stock is notoriously bouncy, and it made sense to buy it on the dip because it should have a great future. Lilly grew earnings 12.7% in 2022 and is expected to grow earnings by an average of 22% per year over the next five years. It also has two drugs that could be mega-blockbusters in the pipeline that could be approved in the next year.” BUY

Gates Industrial Corp. (GTES), originally recommended by Bruce Kaser in the Buy Low Opportunities Portfolio of his Cabot Undervalued Stocks Advisor, has been holding firm at 13 since early March. It probably won’t change much prior to its earnings report, out on May 4. The stock has 20% upside to Bruce’s 16 price target. BUY

Kimberly-Clark de México (KCDMY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, remained relatively quiet ahead of earnings tomorrow (April 25). Analysts expect slight year-over-year dips in sales (-0.6%) and earnings per share (-2.2%). The company has been battling high input costs for the last few quarters ($245 million in Q4), which is likely weighing on estimates. The stock is up slightly since we added it three weeks ago. We’ll see what happens tomorrow. The Mexican subsidiary of Kimberly Clark is a play on Mexico’s manufacturing costs now being about 25% lower than China’s, making its companies more appealing to global shoppers. BUY

Las Vegas Sands (LVS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, bumped to new 52-week highs after reporting even-stronger-than-expected earnings last Wednesday. Fourth-quarter revenue exceeded analyst estimates by 16%, while EPS came in 15% higher as the company’s Macau casinos continue to benefit from China’s post-Covid reopening. Revenues improved to 125% year over year and reached $2.12 billion – its best quarter since 2019, before the pandemic. We are now up roughly 20% on LVS since recommending it in early January. Given that the stock just broke above its early-March highs, it remains a good momentum buy. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, continued to hold in the 282-291 range ahead of earnings tomorrow (April 25). In his latest update, Tyler wrote, “Microsoft (MSFT) is expected to report on April 25. Nobody in the world wants to read about everything expected from MSFT. But suffice it to say investors will be listening keenly to trends in Bing (search engine) and Edge (web browser) usage given the company’s effort to integrate ChatGPT technology. Beyond that, Azure growth will also be in focus. Consensus estimates suggest quarterly revenue should be up 4% to $51.1 billion and EPS should be up 1% to $2.24. Bigger picture, fiscal 2023 revenue is expected to be up just 5% (last year was 18%) while EPS is seen up just 1%. Next year looks better as analysts see revenue up 11% and EPS up 16%.” BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in his Cabot Explorer advisory, stretched to new all-time highs above 171! There were several catalysts, according to Carl in his latest update: “The company announced a share repurchase program as well as increased guidance for 2023. The company now expects sales to grow by 24-30% (earlier estimate – 13-19%), while operating profit is now expected to register 28-34% growth as compared with the earlier forecast of 13-19%. Its popular drug Ozempic is approved for type 2 diabetes, but people have been taking the drug to lose weight because of its effectiveness.” BUY

Realty Income (O), originally recommended by Tom Hutchinson in Cabot Dividend Investor, keeps holding in the 61-62 range, where it’s been all month. In his latest update, Tom wrote, “In a highly uncertain environment like this, where the narrative can change on a dime, income is king. And this legendary income REIT is the king of income stocks. It has paid 632 consecutive monthly dividends and increased the dividend payment 119 times since its IPO in the 1990s. And the REIT has been growing stronger through acquisitions of late. Earnings grew at 9.2% for 2022, which is above the historical average, and they did so in a challenging year. Despite being a retail REIT, the portfolio is largely staple properties like drug stores and supermarkets that are resilient in a slower economy.” HOLD

Sensata Technologies (ST), originally recommended by Bruce Kaser in the Buy Low Opportunities portfolio of his Cabot Undervalued Stocks Advisor, held steady at 47 ahead of tomorrow’s (April 25) earnings report. Analysts are looking for 1% revenue growth and 11.5% EPS growth for the quarter. The stock has 58% upside to Bruce’s 75 price target. BUY

SiTime (SITM), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, has fallen fast since we added it to the portfolio a mere three weeks ago, down roughly 14% from our entry point. With our portfolio nearly full, rather than wait for earnings (May 3) to potentially right the ship, let’s part ways with our one obvious laggard, and preserve an extra spot for next week’s new addition. MOVE FROM BUY TO SELL

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had a bad week – and this time it didn’t have anything to do with Elon Musk’s comments or Twitter. The company reported a weak first quarter, with EPS declining 23% and margins dipping below the magical 20% level – enough to outweigh 24% revenue growth. It’s the kind of quarter investors feared would be the result of all the price cuts the company has been making to some of its signature cars in recent months – six in all, including an 11% reduction in the cost of a Model 3, and a 20% cut in the cost of a Model Y (on average) since the start of the year. Elon Musk said he’s OK with lower margins if it means “higher volumes,” which is what the cuts are intended to create. But so far, Wall Street doesn’t like the trade-off. We’ll see how investors digest the quarter going forward. Cathie Wood pounced on TSLA stock after it fell 10% post-earnings (and 23% from its mid-February high). But with shares having to crane their neck to look up at their 200-day moving average, we’ll keep TSLA at Hold. HOLD

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, has been stuck in a range between 30 and 32 for more than a month. This seems like a very normal holding period after shares of the ride-sharing giant had broken out in January and early February – the stock is still up 23% year to date and trades above its 200-day line (29). BUY

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to rebound beautifully after its first real dip of 2023, recovering nearly all its early-April losses when the stock plunged from 551 to 520 in three days. Shares are now up 15% year to date, more than 40% since we recommended it 11 months ago. BUY

UnitedHealth Group (UNH), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was down about 4% on earnings in the stock’s first week in our portfolio. Not that the company did anything wrong in the first quarter: EPS improved 14% year over year while revenues were up 15%. Furthermore, the company raised guidance for its full-year outlook. UnitedHealth Group is America’s largest insurer and one of the world’s largest private health insurers. The stock has doubled the market, or more, for the past three-, five- and 10-year periods. So, no need to panic after one down week, especially given that the selling came on the heels of a very strong quarter. BUY

Visa Inc. (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor, continued to hold in the 233-234 range ahead of earnings this Tuesday (April 25). Analysts are looking for 8.3% revenue growth and 10.6% EPS growth. Year to date, the stock is up more than 12%. BUY

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, broke to new all-time highs above 190 last week! In his latest update, Mike wrote, “On the news front, Wingstop has inked a deal with a new marketing agency as it looks to expand its brand awareness and keep same-store sales (which have risen an amazing 19 years in a row) pointed up. The quarterly report is due May 3 and will obviously be vital—a very strong few days could be a legitimate breakout.” BUY

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is a rock. It keeps holding in the 37 to 39 range, unaffected by all the volatility and turbulence virtually everywhere else in the market. Our lone ETF offers a high dividend yield and some of the highest-quality emerging market stocks. The fund gives broad exposure with an emphasis on income and value. BUY

Xponential Fitness (XPOF), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, held its highs above 32 last week – impressive considering the selling happening in many growth stocks. We still think it makes sense to shed a few shares if you got in early after we recommended it late last September – and are now sitting on a return in the 75% range. For everyone else, this leader in fitness brands and gyms is a Buy, but you may want to hold off on doing any new buying until after the earnings report on May 4. BUY

The next Cabot Stock of the Week issue will be published on May 1, 2023.