Cabot Stock of the Week Issue: April 29, 2024

Wow, did we need that week!

After a miserable first three weeks of April, stocks finally found their footing last week, as the buyers stepped up, perhaps emboldened by a better-than-expected earnings season (so far) or some much-needed quiet from the Fed. That will change this week, as the Fed will have its latest rhetoric on inflation and interest rates (no change is expected). For now, though, enjoy the reprieve from all the selling. We’ll see if the worst is behind us.

In the meantime, our newest addition is an old-world growth stock that specializes in boring things like pipes and water meters. But at a time when the U.S. is pouring billions into upgrading its infrastructure, this company is benefitting, which is why Mike Cintolo recently recommended it to his Cabot Top Ten Trader audience.

Here it is, with Mike’s latest thoughts.

Core & Main (CNM)

Core & Main isn’t going to wow you with revolutionary products or triple-digit growth, but the firm has a very solid, steady infrastructure-related story that should play out for many years to come thanks to the numerous spending bills passed in Washington (and from individual states) as well as the sorry state of things like water infrastructure (the firm estimates water utilities suffer up to 16% loss of water thanks to old piping). Core & Main is one of two nationwide distributors of pipes, valves and fittings (which make up about two-thirds of revenue), storm drainage and fire protection products as well as water meters; about 80% of its revenue comes from non-commercial and municipal end markets. Core has about 17% market share in total, with its closest peer about the same, meaning two-thirds of the market is served by smaller regional or local outfits—which opens up further market share gains given Core’s stature, as well as through aggressive M&A. Indeed, the firm completed seven (mostly small) buyouts last year and four so far this year, with another couple pending, broadening its reach and product line in different parts of the country. While growth isn’t going to be rapid, sales and earnings growth are expected to begin accelerating in Q1 and, more important, the top brass believes the next few years will be very bullish, with revenues to grow 50% over the next five years while EBITDA lifts 65% and free cash flow soars, allowing for plenty more M&A ($200 million-ish dollars per year) and upwards of $500 million per year of share buybacks and dividends annually, too. (The Q4 share count was down a whopping 13% from a year ago!) It’s a very solid infrastructure-related story.

As for the stock, CNM came public in mid-2021, etched a huge post-IPO base for the next two years and broke out on the upside last November. And that led to a beautiful run, with just two down weeks (both in January) and ended with a superb earnings pop in March. Now CNM is pulling back in a controlled manner on very light trade as the 50-day line approaches—we’re OK buying some here or on further dips toward support with a reasonable stop.

Current Recommendations

Changes Since Last Week:
International Business Machines (IBM) Moves from Buy to Hold
PulteGroup, Inc. (PHM) Moves from Hold to Buy

No sells this week, for the first time in a while, as we let the portfolio breathe after a strong week for the market. Still, at 27 stocks with the addition of Core & Main (CNM), we’re about two stocks heavier than we’d like to be. I still plan to sell a couple more laggards in the coming weeks. Fortunately, there weren’t many of those this week, with a number of our stocks up 6%, 7%, 8% on very little news, and some even more than that on earnings. Tesla (TSLA), proving its resilience once again, was our best performer this week, up more than 15% today alone after a visit to China by Elon Musk netted a potentially very fruitful new deal for the company.

Here’s what’s happening with all our stocks as we head into May.

Updates

Alamos Gold Inc. (AGI), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was up marginally in its first week in the portfolio after reporting solid first-quarter earnings results last Wednesday. The gold miner achieved record quarterly revenue of $277.6 million, up 10% from Q1 of 2023, thanks in part to record gold prices and its own 6% uptick in production, to 135,700 ounces. We added Alamos as a play on surging gold prices, which have risen to all-time highs above $2,400 an ounce as both geopolitical fears (wars in Gaza, Ukraine) and Fed/inflation concerns have driven investors to gold, a traditional safe harbor. Alamos’ Q1 results bolster our case for adding it. As long as gold prices remain elevated, AGI shares – up 18% in the last six months – should continue to benefit. BUY

Alexandria Real Estate Equities, Inc. (ARE), originally recommended by Tom Hutchinson in the Safe Income Tier of his Cabot Dividend Investor advisory, was up 1% after reporting earnings last Tuesday. Adjusted funds from operations (AFFO) per share of $2.35 topped estimates of $2.31 and improved 7.3% from the first quarter a year ago. Leasing activity and rental rate growth increased for the life sciences property REIT. Meanwhile, revenues of $769.1 million grew 9.7% year over year and also outpaced expectations of $765.9 million. While the solid results only moved the needle slightly for ARE shares in the immediate aftermath, they were encouraging in the big picture as they indicated some thawing in the office retail space – or at least in the very niche laboratory spaces that Alexandria primarily leases. Rental rate growth improved by 33% – showing that companies that lease Alexandria’s laboratory spaces are willing to pay higher prices. With ARE shares still trading below their 50-day line (122), however, we will keep the stock at Hold for now. HOLD

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had an excellent bounce-back week, rising 11% to recover most of its April losses. There was no company-specific news, so the rebound in the share price was likely spurred by the rebound in the market and a better-than-expected Q1 earnings season thus far, particularly for retailers – consumer discretionaries have reported 18.8% EPS growth. We now have a 47% gain on AEO shares in just six months. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, held firm again and has steadied itself after a 7% retreat earlier this month. There’s been no news. Shares of this U.K.-based life insurance and investment management firm remain a solid, reliable position in our portfolio and still have 17% upside to Bruce’s original 14 price target. The 7.1% dividend yield adds to the appeal. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up about 2.5% along with the market – doing its duty as a “Bull Market Stock.” It also may have gotten a bump from winning a bidding war to acquire Hipgnosis Song Fund for $1.57 billion; Hipgnosis owns the music rights to artists including Beyonce and Mark Ronson. Blackstone beat out Concord Chorus in the bidding. But Blackstone’s greatest utility as an investment is its knack for thriving in bull markets, which it has done the last six months. We will continue to recommend BX shares as long as the bull market remains intact. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, is back with a vengeance! AVGO shares are up more than 9% since our last issue, recovering from a rough patch on no news. As Tom wrote last week prior to the recovery, “You know the technology sector has hit a rough patch when AVGO takes a hit.” He added, “When the AI excitement kicks up again the stock will probably have another run.” We’ll see if last week was the start of another push higher. Regardless, we’re now back to better than a 50% gain on the stock, and momentum has at least temporarily returned. BUY

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, had an even better week than Broadcom, advancing more than 15%! The only real news was anticipated – the upstart restaurant chain just opened its first Midwest location, in Chicago. That gives it 325 stores in 25 states plus D.C., with the goal of increasing its restaurant count by 15% both this year and next. Plenty of growth happening here, and investors are starting to snatch up shares again after a down first half of April. Our timing may have been ideal here. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, bounced off support in the low 280s and is up more than 7% since our last issue, recovering about half of its April losses. In his latest update, Mike wrote, “CrowdStrike (CRWD) has bounced a bit this week after a four-week, very low-volume dip. The negatives here are that the group has turned very weak—peers like Palo Alto (PANW) and Zscaler (ZS) look poor—though CRWD has been the hands-down leader, with its super-bullish long-term outlook likely to keep big investors involved. Our patience isn’t limitless, but having already sold some, we’re willing to grit our teeth and give this stock a chance to round out a new launching pad. Earnings here aren’t out until late May.” We downgraded to Hold last week and will keep it right there for now. HOLD

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, also rebounded, finding support at 40 and clawing its way back to 43 ahead of earnings this Thursday, May 2. In his latest update, Mike wrote, “DraftKings (DKNG) is dancing around support, with earnings (due May 2) likely to tell the tale. In our heart of hearts, we think there’s upside here—one analyst started coverage recently, saying it expects solid 20%-ish top-line growth for many years with EBITDA likely to top forecasts for the next couple of years with improving unit economics and, of course, opportunities from legalization in more states.” We have a large gain, but keep new buys small ahead of the earnings report. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was flat ahead of earnings tomorrow, April 30. Expectations are high: Analysts are looking for 28% revenue growth and 53% EPS growth. In his latest update, Tom wrote, “LLY appears to be in kind of a holding pattern until there’s more news. It’s been going sideways since the middle of February. But going sideways is encouraging after the massive couple of years this stock has had. But good news is probably coming. … The weight-loss drug is a monster and looks like a mega-blockbuster, and the Alzheimer’s drug should get the nod in the next few months.” BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, has been chopping around but was mostly stagnant in the aggregate since our last issue. Earnings are due out May 8. But the bigger catalyst is an industry one, as cannabis is awaiting Drug Enforcement Administration (DEA) approval to move from a Class I to a Class III drug. It could happen any day … or not for a few months. When it does happen, it should be an immediate jolt of energy for cannabis stocks. If you don’t already own the stock, I’d recommend doing so now, ahead of Green Thumb’s earnings and before rescheduling news hits. BUY

Honda Motor Co. (HMC), originally recommended by yours truly in the Growth & Income Portfolio of Cabot Value Investor, mostly held firm at 34, though it did briefly dip to 33. Here’s what I wrote about it in last Wednesday’s Cabot Value Investor update: “One week after announcing plans to launch six next-generation electric vehicles in China by 2027, Honda set its sights on Brazil, saying it will pour $808 million into its Brazilian Itirapina plant by 2030. The main focus will be to develop a hybrid car for the Brazilian market, which would run 100% on ethanol. The announcement didn’t move the needle much for the share price – Honda’s stock is exactly flat in the last week – but it was the latest evidence of the company’s global pivot to expanding its hybrid offerings.

“Honda shares remain dirt-cheap at 7x earnings and with a price-to-sales ratio of 0.46. The EV/EBITDA is a microscopic 0.04.

“The stock has 29% upside to our 45 price target.” Earnings are due out May 9. BUY

International Business Machines (IBM), originally recommended by Carl Delfeld in Cabot Explorer, reported earnings last Wednesday, and boy did the market hate them. A mere 1.5% revenue growth was uninspiring, despite being offset by 73% EPS growth, and IBM shares have sold off, plummeting from 184 to 167 on high volume. It’s enough to downgrade the stock to Hold until the bleeding stops. Carl did note a positive takeaway from the earnings report, which provides a glimmer of hope for a quick turnaround: “On the positive side, IBM announced it has agreed to buy HashiCorp, which sells software that helps companies manage their cloud-computing operations, for an enterprise value of $6.4 billion. The acquisition is IBM’s largest since buying Red Hat in 2019 for $31.8 billion.” The post-earnings selloff may have been overdone, but let’s wait out the storm until the clouds part. MOVE FROM BUY TO HOLD

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, has steadily recovered after a mid-April retreat, advancing back to 375 after bottoming at 366. The company is coming off a strong earnings report. The company comfortably beat top- and bottom-line estimates, with EPS up 22% year over year on an 11.5% revenue improvement. Furthermore, the maker of the da Vinci robotic surgery system is set to roll out the da Vinci 5 after it received FDA approval on March 14. Mizuho Securities analyst Anthony Petrone speculated that full-scale launch won’t come until next year due to supply constraints. So, investors are waiting. But they won’t wait forever, as the new surgical platform could be a game changer for Intuitive, prompting healthcare providers to replace their old da Vincis. Patience will likely be rewarded here. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, finally budged from 47, jumping to the mid-49s ahead of earnings this Thursday, May 2. The fact that the stock is actually up in April is impressive, as Tom noted in his latest update: “The Business Development Company didn’t get hurt at all in the rough market. The stock isn’t interest rate-sensitive because it has a higher yield, and its companies perform well in a strong economy. Although MAIN is currently selling near the 52-week high, it is still reasonably priced at less than 1.6 times book value, and most valuation measures are below the 5-year average... The safe and high yield pays dividends every single month with a strong possibility of supplemental dividends over the course of the year as well.” Keep new buys small ahead of the Thursday report, especially with shares trading at new 52-week highs. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, is flat since last Thursday’s earnings report despite some chopping around. But the earnings results were again impressive, as Tyler wrote: “The Q3 fiscal 2024 earnings results show the company is still a beast and should get the stock moving in the right direction again.

“Revenue was $61.86 billion (+17%) and beat by a cool billion while EPS was $2.94 (+20%) and beat by $0.12.

“There are lots of details that could be discussed with a company operating at Microsoft’s scale, but the most important takeaway is that Microsoft continues to attract a growing share of IT spending budgets, and Generative AI revenue is growing (the same can’t be said at many other companies).

“The proof points here are Commercial Bookings growth of 31% (strongest in six quarters) and Azure growth picking up to 31% too. On Azure, Generative AI contributed to 7% of that growth (non-AI Azure accelerated from 22% last quarter to 24% in Q3) DESPITE demand exceeding supply. That means Microsoft will continue to spend on AI infrastructure. …

“If there is one complaint, and it’s a small one, it’s that Copilot revenue was underwhelming. But this product was just launched, and management talked about several customers buying over 10,000 Copilot seats. So it seems there is more to come here.

“Big picture, Microsoft remains the dominant company in AI, with plenty of other sweeteners to boot. Price target increases are pouring in.” BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, found support in the mid-550s after imploding on earnings the previous week. Revenue grew 15.2% to $9.4 billion (beating by 1.3%, or $125.2 million) while EPS grew 83.3% to $5.28 (beating by 16.7%, or $0.76). Net streaming additions was 9.3 million, way ahead of expectations. But forward full-year guidance came in light, and the company said it would stop sharing subscriber numbers, drawing suspicion. Still, that all seems like relatively small potatoes, and I would expect a bounce-back as long as the market continues to recover. I’m surprised it hasn’t already, but at least shares have appeared to carve out a bottom. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, is threatening to break out of its recent 124-to-127 range. In his latest update, Carl wrote, “Novo Nordisk (NVO) shares ticked up a couple of points as the company’s next-generation weight-loss pill amycretin outperformed blockbuster Wegovy in an early-stage study. Amycretin recipients lost more than 13% of their body weight. By comparison, people taking Wegovy lose about 6% body weight over the same time period. The market for obesity medications could grow to $100 billion in the next decade, according to Barclays and Goldman Sachs.” BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, bounced back nicely this week, getting back to 62 after dipping below 59. In his latest update, Mike wrote, “Nutanix (NTNX) is now seven weeks into a tedious, but normal-looking, rest period, which comes after a near-straight-up run in November-February. Having sold some weeks ago, we’re giving NTNX some rope, as its tech platform should see strong demand for years (helped by share gains at the expense of VMware, which was acquired by Broadcom), with booming cash flow thanks to its subscription model. Hold on if you own some, and if not, we’re OK grabbing some shares here, though it’s probably best to keep it small given the environment.” Good advice. We’ll keep the stock on Buy, but keep new positions small until shares can string together at least a couple good weeks. BUY

PayPal (PYPL), originally recommended by Carl Delfeld in his Cabot Explorer advisory, had an excellent bounce-back week (+8%) and is threatening to break to a new 2024 closing high above 67. Here’s what Carl had to say about it: “PayPal (PYPL) shares trended up this week as fintech stocks gained more traction overall. PayPal is best known for its namesake payment platform, but the company also owns the popular Venmo app. This stock is a good value given its substantial base of users and the upward trajectory of online shopping. According to Boston Consulting Group, the worldwide fintech sector is expected to be worth $1.5 trillion by 2030.” BUY

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, got an 8% boost this past week after reporting strong earnings. Mike has the details: “PulteGroup (PHM) is still doing very well, though mortgage rates continue to push the stock around. In the first quarter, sales (up 10%) and earnings (up 32%) easily topped estimates, while net new orders lifted a solid 14% thanks in part to a sharply lower cancellation rate (10% vs 13% a year ago). The stock popped on the news, which was obviously welcome, though it’s backed off the past couple of days as rates have ratcheted up (10-year note yield hit its highest level today since November 1)—but, overall, the action is acceptable.” We now have a 25% gain on PHM in less than five months. Let’s move it back to buy on renewed momentum. MOVE FROM HOLD TO BUY

Qualcomm, Inc. (QCOM), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is in recovery mode ahead of earnings this Wednesday (May 1), rising from 157 to 167 to get back about half its April losses. This week’s report will likely determine where the stock goes next. Stay tuned – and keep new buys small before the report. BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is the rare stock having a strong April, advancing from 53 to 64 this month. The latest bump came after both JPMorgan and Bank of America upgraded shares of the South Korean tech conglomerate, with each firm setting a price target of 70. The company generated a record-high $13 billion in revenue last year, led by its popular e-commerce segment. It still trades at less than 3x sales. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has done it again. Just when you thought, maybe, the stock might not be able to get off the mat this time following three straight disappointing quarters … shares are at two-month highs, and up more than 16% on Monday as I write this. Why? A new driving system in China. Elon Musk paid a visit to the country that has been a thorn in Tesla’s side of late due to increased competition from the likes of BYD, Geely and Li Auto. His visit worked: Tesla gained approval from the Chinese government (no easy task!) to use its driver-assisted software in China, thanks in part to a mapping and navigation deal with Chinese tech giant Baidu (BIDU). The company charges $8,000 for its driverless system in the U.S., so the approval in China could be a windfall for the company at a time when it desperately needs it. We’ll keep TSLA shares at Hold for now. But this was a great week for the company, and a reminder of why it’s still in the Stock of the Week portfolio more than 12 years after we first recommended it. HOLD

Tripadvisor (TRIP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, bounced back nicely like many of our stocks, bumping from 25 to 27. There was no news. Earnings are due out May 7. This is a play on the ongoing travel recovery in a post-Covid era and could start to pick up steam ahead of the always busy summer travel season. BUY

Uber Technologies (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, still hasn’t quite found a bottom, hovering around the 68-69 range with no boost from last week’s market pickup. In his latest update, Mike wrote, “Uber (UBER) hasn’t bounced much this week, though some of that was due to Tesla’s quarterly report, with the top brass there talking a lot about launching a taxi service (with autonomous vehicles) to compete with Uber and Lyft, with a reveal likely in August. It’s always possible that really changes the game, but that firm is years behind when it said it was looking to launch the offering, and it’s also possible a firm like Uber, with a huge market share and with investments in autonomous technologies, too, continues to squash the competition. (We also wonder how big the uptake will be of people wanting to hop in a car with no driver.) Right now, UBER is about 15% off its high—not fun, but not crazy after the big fall/winter rally.” HOLD

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. Chinese stock expert Larry Cheung joined Brad last week for deep dive on all things China (I was on vacation with my family). It’s worth a listen.

The next Cabot Stock of the Week issue will be published on May 6, 2024.

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