Cabot Stock of the Week Issue: April 3, 2023

For a quarter that featured two more interest rate hikes by the Fed, two of the three largest bank collapses in U.S. history and inflation remaining north of 6%, stocks performed quite well. The S&P 500 was up 7%, the Dow was up 1%, and the Nasdaq was up a whopping 16%. Those are the types of quarterly returns you typically see in bull markets, not bear markets. So, for all the supposed fears of bank contagion, increased Fed hawkishness and a potential looming recession, the investors that move the market weren’t acting all that fearful. Wall Street is in a buying mood again.

Yes, the rug could be pulled out from under us all yet again, especially if another bank goes under, if next week’s CPI number comes in hotter than expected, or if first-quarter earnings disappoint. But as of this moment, the market is the best it’s looked since 2021 – and far less overcooked. So this week, we’re taking another big swing by adding a rather speculative growth stock with loads of momentum. It’s a small-cap semiconductor stock that’s up 35% year to date, and a recent addition by Tyler Laundon to his Cabot Early Opportunities portfolio.

Here are Tyler’s latest thoughts on it.

SiTime Corp. (SITM)

Worldwide semiconductor sales peaked last year as buyers that had struggled through pandemic-related supply disruptions bought up whatever they could get their hands on.

The industry has since hit an air pocket, as have semiconductor stocks. Revenue for the S&P 500 semiconductor industry is expected to fall 10% this year.

But semiconductor companies (and forward-looking investors) see brighter days ahead. Industry analysts see shipment volumes trending higher as supply and demand come back into balance, ultimately pushing 2024 industry sales up over 14%.

One way to play the recovery trend is with SiTime Corporation (SITM). The company is a fabless semiconductor company that provides MEMS (micro-electro-mechanical systems) and silicon-based timing systems.

The product portfolio encompasses oscillators, clock ICs and resonators. Some solutions include all three in a single package.

Silicon MEMS is a superior technology as compared to quartz crystal because it offers higher performance, programmability and lower power consumption.

The company serves a market where electronics are moving beyond controlled environments and into the great outdoors, where temperatures, interference, shocks, vibration and more are thrown at electronic systems.

SiTime serves the datacenter, auto, aerospace, industrial and mobile/consumer electronics markets with robust systems that can handle varying temps, shocks, vibration and other atmospheric challenges.

Apple is a major customer (+20% of revenue).

Despite ongoing supply challenges, SiTime continues to roll out new products. It introduced four in the fourth quarter of 2022 and expects to introduce five more in 2023.

These new solutions are helping to drive average selling prices (ASPs) higher, and management expects pricing in 2023 will be stronger than in 2022.

That said, the company is still working through the aforementioned supply-demand imbalances.

After enjoying a surge in growth in 2021 (revenue up 88% to $219 million) SiTime grew by “just” 30% in 2022. In Q4 2022 revenue was down by 20%.

Sales in Q1 2023 and Q2 2023 are expected to be down by 46% and 48%, respectively.

All in, analysts see SiTime’s 2023 revenue falling by 26% from 2022, to $210 million. EPS is expected to fall 64%, from $3.66 last year to $1.32 this year.

That’s not great. But like I said, semiconductor investors are forward-looking. And the dip in sales is likely priced into SITM stock.

Management says excess inventory should be drawn down in the first half of the year. The first quarter should be the low point.

There are signs that the recovery in China is getting better, and large customer Apple may be enjoying strength there and working through its subcontractors’ excess inventory.

As it stands now, analysts see full-year 2024 revenue of about $270 million, up 29% from expected 2023 revenue. That’s roughly twice the expected growth rate of the broader semiconductor industry.

EPS in 2024 is seen doubling to around $2.71, more than three times the expected earnings growth of the industry.

The next event for SiTime comes in May when Q1 2023 results come out. I’m not expecting a brilliant quarter. But I am expecting more evidence that the trends are turning from “bad” to “better.”

And that should keep SITM stock trending higher.

As you can see from the chart (below), SITM has been grinding higher since the stock bottomed near 73 back in October. It’s up about 90% since. And shares have consistently bounced off their 50-day moving average line (currently at about 128).

Going back a few more years, SITM came public at 13 in November 2019 and had a heck of a time during the pandemic. In November 2021 the stock peaked at 342!

Tall trees fall hard, especially in semiconductor land. SITM was no exception. As just mentioned, this was a $73 stock in October. But the trend since then is good.

There could be some overhead resistance around 155-160, where the stock found support last spring. But provided the industry forecast remains much brighter than the recent past, and management continues to execute (look for confirmation on the Q1 earnings call in May), I expect SITM can work through that zone.

Current Recommendations

Changes Since Last Week: None

No changes this week, which means with the addition of SiTime (SITM), our portfolio is back up to 18 stocks. Two of those stocks – both in the retail space – are hitting new all-time highs! Nearly all of them were up this week, along with the market. There is a lot to like in our portfolio right now, so let’s get to what’s happening with each of them.

Updates

Arcos Dorados (ARCO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, recovered some losses last week after declining for most of March. Latin America’s largest McDonald’s franchisee is coming off a solid quarter in which earnings (26 cents per share) surpassed estimates (23 cents) and were up from 22 cents per share a year ago, while revenues improved 30% in the quarter and were up 36% for full-year 2022. The stock hadn’t responded favorably to those earnings until last week, but it did bounce off the 200-day line, which could be a jumping-off point for a longer rebound. HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, just broke to its highest point in nearly a year! After repeatedly topping out at 50 for several weeks, CSCO finally had a breakout, rising to 52 on no real news. The stock still has 27% upside to Bruce’s 66 price target. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, is in recovery mode, rising to just shy of 38 after bottoming at 35 in March. The stock is up 8.4% year to date, though is shy of its peak above 41 from early February, as well as Bruce’s price target of 42. With momentum returning, this looks like a good entry point into one of the world’s largest media and entertainment companies. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was up 2.7% this week in sympathy with the market. There was no company-specific news. In his latest update, Tom wrote, “After a stellar 2022 where it returned 34% in a bear market, LLY is having a tough time this year, although it has been moving higher lately. LLY is notoriously bouncy and tends to pull back after every surge. Despite the recent earnings stumble, this company still 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. Because of the recent price dip, the strong earnings outlook, and the possibility of big upside news, LLY was recently upgraded to a BUY.” BUY

Gates Industrial Corp. (GTES), originally recommended by Bruce Kaser in the Buy Low Opportunities Portfolio of his Cabot Undervalued Stocks Advisor, was up 3.7% this week. Shares of this specialized producer of industrial drive belts and tubing are now up 21% year to date, though they’re still shy of their early-March highs and have 15% upside to Bruce’s 16 price target. BUY

Las Vegas Sands (LVS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had a very good week, rising to 59 from 54 after data showed that gaming revenue in Macau more than tripled in March (+247%), boosting all casino stocks with properties in Macau. Mike’s premise in recommending LVS was that China’s casinos were about to get a flood of activity in the wake of the country finally reopening after several years of draconian zero-Covid policies. Last month’s numbers overwhelmingly support his theory, and the stock is now up 22% year to date. BUY

Kimberly-Clark de México (KCDMY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was up marginally in its first week in the portfolio. Kimberly-Clark de México was founded in 1925 and is based in Mexico City, Mexico. Its parent, Kimberly Clark (KMB), was founded as a paper company in Neenah, Wisconsin in 1872. Kimberly-Clark de Mexico is a play on Mexico’s manufacturing advantage over China and the U.S., as costs of production are 25% lower – making it appealing to companies from around the world. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, just keeps rising! It’s now up to 287, its highest point since last August, and is benefitting from the ongoing flight to mega-cap tech stocks as investors sick of sitting on the sidelines in this bear market seek growth – but “safe” growth. Plus, Microsoft’s leading position in the red-hot artificial intelligence (AI) industry is surely helping, as Microsoft just unveiled the Microsoft 365 AI Copilot, which uses ChatGPT technology to create everything from Word documents to PowerPoint presentations to Excel spreadsheets. The new product prompted a round of analyst rating upgrades, including Mizuho bumping it to 315 a share. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has really broken out the last two weeks, zooming to 158 from 138. It’s now up 17% year to date. One recent catalyst, according to Carl, is that the “World Health Organization (WHO) will consider adding obesity treatments to its ‘essential medicines list.’” That comes on the heels of a strong 2022 for the company’s weight loss drug, Wegovy, which saw a 26% bump in sales from 2021. Now, it plans to ramp up production of Wegovy – and the WHO’s potential decision is likely adding more fuel. BUY

Realty Income (O), originally recommended by Tom Hutchinson in Cabot Dividend Investor, recovered some of its recent losses, rising to 63 from 60. In his latest update, Tom wrote, “In a rudderless and directionless market, 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 it did it 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. O should continue to be an investor favorite in this tough market.” HOLD

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up slightly this past week, although it was down big this morning. Underwhelming first-quarter delivery numbers are the reason behind the selling. The company delivered 422,875 vehicles in Q1 – a new record, but only a 4% improvement over the same quarter a year ago. Considering this was the first quarter since Tesla slashed prices on some of its cars by as much as 20%, the 4% increase is being viewed as a disappointment. It’s also fueling speculation as to whether the company may need to slash prices even further, which could weigh on profit margins – which have long been the envy of the electric vehicle industry. We’ll see whether the mild delivery numbers send TSLA shares tumbling again or if it’s a one-day overreaction. HOLD

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, has been stuck in a range between 30 and 32 for the past three weeks. This seems like a very normal holding period after shares of the ride-sharing giant had broken out in January and early February – it’s still up 27% year to date, and trades comfortably above its 200-day line (28). BUY

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is hitting new all-time highs yet again! After pulling back modestly through most of March, shares of the beauty retailer exploded last week, easily eclipsing their previous high of 531 on no major news, although an analyst at Piper Sandler did raise their price target to 615 from 610. We now have a gain of 43% in less than a year. If you got in early after our recommendation last May and want to book profits on a few shares now, that would make sense. Otherwise, we’re keeping this remarkable retail stock at Buy. BUY

Visa Inc. (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was up more than 2% this week, in lockstep with the market. In his latest update, Tom wrote, “V is tied to the fortunes of the more cyclical stocks in the near term. But it tends to outperform that group. It held up nicely in a very tough 2022 with a -3.4% return for the year, it’s up 25% since the September low, and it has a positive return YTD. Of course, it could be under pressure if the economic situation deteriorates. But the stock is still relatively cheap and it should fly when the market eventually senses the end of this cycle and the next recovery.” BUY

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, held firm again this week, as it has the last several weeks on the heels of a big gap up in mid-March. In his latest update, Mike wrote, “Wingstop (WING) suffered yet another downgrade this week, which led to some selling, but the stock is still perched near its highs; most of these analyst moves have been valuation-based (as opposed to signs the business is turning down), which is probably one reason the stock has taken things in stride so far. We’re open to anything, but given the overall picture, we advise sitting tight.” 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, is pushing to new all-time highs today. There’s been no company-specific news; rather, XPOF keeps rising to its stellar growth as the world returns to gyms in the wake of Covid. In the latest quarter, Xponential Fitness’ revenues improved 44% while earnings per share more than tripled. We now have a 65% return in six months on XPOF; as with ULTA, if you got in shortly after our late-September recommendation it makes sense to sell a few shares now and let the rest ride. For everyone else, it’s a Buy. BUY

The next Cabot Stock of the Week issue will be published on April 10, 2023.