Cabot Stock of the Week Issue: April 8, 2024

You are receiving today’s issue a tad earlier than usual, as I am in the very fortunate geographical position of living in the “path of totality” of today’s solar eclipse, meaning the moon will completely obscure the sun later this afternoon here in Vermont. It should be quite the spectacle – one that’s expected to attract as many as 200,000 tourists to our tiny little state of roughly 650,000 people. So, to make sure I don’t miss it (total eclipse is expected to occur around 3 p.m. local time; it’s also my son’s 10^th birthday!), I am delivering this week’s Stock of the Week bright and early. I’ll try and include photos in next week’s issue if I get any good ones!

Now, on to the market…

Stocks are off to a sluggish start in April, which should come as no surprise coming on the heels of a banner first quarter of 2024. The damage has been minimal, and seemingly all of it was brought on by the Fed, or at least two members of the Fed (Austan Goolsbee and Neel Kashkari) saying they could see no rate cuts this year if inflation remains stubbornly high. Those comments prompted some selling last Thursday, but the market quickly realized it was just the opinion of two members; the rest of the Fed is sticking to its messaging of likely cutting multiple times in the second half of the year.

This Wednesday’s CPI print could bring some clarity. But you’re better off not worrying too much about the Fed, since it appears even temporary concerns by the market are forgotten within a day or so. The bull market is still very much intact, and most of our stocks are acting well.

One other note, by way of introducing today’s new stock: Bruce Kaser has ceded the reins of Cabot Value Investor, as he scales back his schedule to manage his family’s portfolio, and I have taken his place as Chief Analyst of Cabot Value Investor! My first issue since taking over for Bruce was last week, and I added a stock to the Value Investor portfolio that isn’t so much a pure value stock as a growth stock at value prices. It’s a household name in the auto industry and one that’s benefitting from America’s increasing love of hybrid cars. The stock has momentum but is still dirt cheap.

Here are my latest thoughts on it.

Honda Motor Co. (HMC)

Honda has found new life thanks to hybrids – i.e., cars that use both the traditional internal combustion engine and an electric, battery-powered motor. After years of declining sales, Honda was rejuvenated in 2023 thanks to hybrids.

The Japanese automaker sold 1.3 million cars last year, up 33% from 2022; a quarter of the cars it sold were hybrids, led by its popular CR-V sport utility vehicle (SUV) and Accord mid-size sedan. The CR-V was the best-selling hybrid in the U.S. last year, with 197,317 units sold. The Accord wasn’t far behind, with 96,323 sold. All told, Honda’s hybrid sales nearly tripled in 2023, to 294,000 units.

So, Honda is making the full pivot to hybrids, with the Civic soon to become the latest addition to its hybrid fleet. It’s part of a larger industry trend, where hybrids are gaining in popularity while the once-stoppable growth in pure electric vehicles has slowed. While Americans bought a record 1.2 million electric vehicles last year – up 46% from 2022 – hybrid sales surged 65%. When you include plug-ins, roughly 10% of all new cars purchased in the U.S. in 2023 were hybrids, vs. a 7.6% market share for pure electrics.

Investors have started gravitating more to the companies that sell them. Invariably, those are well-established, big-name car companies made famous by many decades of selling internal combustion engine vehicles; most aren’t ready to fully abandon their roots but want to tap into the surging national (and global) appetite for electric, so they instead are turning to hybrids as a compromise. As a result, these once-stodgy car companies are tapping into new revenue streams, and their share prices are surging accordingly.

That includes the likes of Toyota (TM) and Hyundai (HYMTF). But Honda (HMC) is the best value, trading at a mere 7.9x forward earnings estimates, 0.47 times sales, with an EV/EBITDA ratio of a microscopic 0.04. Trading in the mid-36s, shares have surged of late, up 18% in 2024 and 38% in the last year. And yet, they’re 18% below their peak above 44 in 2011.

Honda aims to boost sales by another 10% this year – a likely conservative estimate, considering its hybrid sales tripled last year and will only become an even bigger slice of the pie in 2024. Meanwhile, earnings per share are expected to come in at $4.20 in the current fiscal year (results will be reported on May 9), which would mark the company’s most profitable year since 2018 and a 47.7% improvement from fiscal ’23. EPS is expected to swell to $4.56 in fiscal ’25 (which technically started this week), and $4.89 in fiscal ’26.

Given Honda’s renewed, hybrid-assisted growth, HMC shares are cheap by every measure. And now they have momentum. I’m setting a price target of 45, which gives us 22% upside. I think it could get there quickly if the bull market remains intact. BUY

Current Recommendations

Changes Since Last Week:
Cisco Systems (CSCO) Moves from Buy to Sell

One sell again this week, as Cisco (CSCO) has underwhelmed since we added the large-cap value stock to our portfolio in late January. No room for laggards in this market. So, our portfolio remains at a bloated 28 holdings with today’s addition of Honda (HMC). I still endeavor to cut that number down to about 25 or less, but again, I don’t want to just toss out perfectly good stocks willy-nilly. So, one out, one in, for a second consecutive week.

Here’s what’s happening with all our stocks, most of which held up quite well even in a down week for the market.

Updates

Alexandria Real Estate Equities, Inc. (ARE), originally recommended by Tom Hutchinson in the Safe Income Tier of his Cabot Dividend Investor advisory, dipped a point, but remains in its standard 123-129 range from the past month. There was no news. Earnings for this life sciences property REIT – a play on the Fed’s intent to start cutting interest rates at some point later this year – are due out in two weeks, April 22. It may not move much until then. But at least it pays a generous 4% dividend yield to those who hold it. So for now, keep holding. HOLD

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been yo-yo-ing between 26 and the mid-24s since running up from 22 in mid-March. There’s been no news, though the retail sector continues to look solid. We have a 44% gain on AEO in just over five months. The latest mini-dip looks buyable if you don’t yet own the stock. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, keeps hovering in the mid-12s after running up from the mid-10s in February and March. Shares of the U.K.-based life insurance and investment management firm are still benefitting from a strong full-year 2023 earnings report from early March. Treading water during the last two down weeks is a good sign. A break above 12.7 would be bullish. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is off about 3% since hitting new 52-week highs near 131 in late March. That’s in line with the pullback in the market of late, as this is what Mike calls a “Bull Market Stock,” which tends to outperform the market when times are good – but can get dinged on hiccups like the one we’re currently experiencing. But pullbacks are normal, and I don’t think the bull market is over by a long shot. So, BX stays in the portfolio until it is. Earnings are due out April 18, which could be a nice short-term catalyst. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, held firm this past week as the stock has settled into a tight range since the third week of March. 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.” BUY

Cisco Systems, Inc. (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Value Investor, dipped from 50 to 48 this week and hasn’t been above our 52 entry price since we added it to the Stock of the Week portfolio in late January. Let’s say goodbye to it. The stock still holds some appeal for value investors, trading at less than 13 times forward earnings and an EV/EBITDA ratio of 10, so for now, I will keep it in the Cabot Value Investor portfolio. But in our crowded Stock of the Week portfolio, it’s time to sell, eat the modest loss and make room for more exciting future opportunities. MOVE FROM BUY TO SELL

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, has slowly given up some of its considerable gains since topping out at 334 in mid-February, dipping from 319 to 315 this week. In his latest update, Mike wrote, “CrowdStrike has the story and numbers and chart action that should support it going nicely higher, assuming the market does the same in the months ahead—but, near term, the action has been sluggish, with the post-earnings reversal creating some overhead that might take some time to chew through. Combined with the sluggishness in growth stocks and in many peers, we decided to trim our position just a bit last week, selling 20% of our shares; as usual, the idea is to put a little profit in our pocket while giving the rest room to maneuver, thinking CRWD can be a bigger winner over time as it morphs into a liquid leader. As for the here and now, we’re encouraged that the stock has kept finding support near its 50-day line, and if it really rallies from here, we’re all for it—but given everything, we think Hold remains the appropriate rating as we wait patiently for CRWD and growth stocks to show their near-term cards.”

We advised booking profits on up to a third of your original position several weeks back, as we have a gain of close to 100% since adding this to the Stock of the Week portfolio last September. We’ll keep CRWD on buy, though another dip below 315 support could prompt us to downgrade to Hold. BUY

Dave & Buster’s (PLAY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, got a nice initial bump from earnings last week, though some of the air has been let out of the balloon since as Wall Street continues to digest the somewhat mixed results. The entertainment restaurant chain’s 2024 fiscal year ended February 4, and for the year revenues improved 12% to $2.2 billion, a new record. While net income did dip to $127 million from $137 million in fiscal 2023, its profit margin expanded to 5.8%. Meanwhile, the company reiterated its intent to repurchase $200 million in shares, which reduces its share count by 7%. All told, the business looks pretty healthy, supporting Mike’s original theory that this is a post-Covid turnaround story. We now have a 27% gain on the stock in just three and a half months. BUY

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, bounced back nicely this week, going from 45 to 47 after dipping from 48 the previous week. In his latest update, Mike wrote, “DKNG acted pristinely for weeks, but after bursting to new highs two weeks ago, the stock ran into selling on two pieces of negative news: First, it looks like some regulators might be taking a closer look at the group, making sure DraftKings and FanDuel (FLUT) aren’t targeting gambling addicts. And second, the NCAA said it would aim to stop any online prop bets for college players, which are popular (and usually carry good ‘margins’). The action isn’t good, but at this point, shares have ‘only’ fallen back to the top end of their prior range and are holding above their 25-day line. If DKNG can’t bounce relatively soon, we could flip back to Hold, but right here we’ll lean positive—we’re OK picking up a few shares if you’re not yet in.” We’ll stay on Buy as well. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is back near its early-March highs, adding nearly 3% in a down week for the market! It’s a sign of this biopharma giant’s resilience thanks largely to its position as co-leader (with Novo Nordisk – see below) in the weight-loss drug space, thanks to Mounjaro. The stock got knocked back in late March after the FDA delayed a decision on its high-potential Alzheimer’s drug candidate, donanemab, until later this year, but that would merely be an added bonus given the strength of Mounjaro, which helped the company crush earnings in 2023 and up guidance for 2024. This has been our best-performing stock since we added it to the portfolio a year ago, and we now have a 137% gain on it. I highly encourage you to book profits – up to a third of your original position – if you still haven’t done so. For those who have not yet bought or are light on LLY, it’s a Buy. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, was down slightly after a red-hot stretch in which it gained 30% in three weeks. Near-term catalysts for the cannabis sector – namely rescheduling, from a Class I to Class III drug by the Drug Enforcement Administration (DEA), which could happen as early as this month – remain, which is why cannabis stocks like GTBIF are attracting more believers than they have in years. If you’re starting to become a believer yourself, this recent mini-dip looks like an ideal entry point. BUY

International Business Machines (IBM), originally recommended by Carl Delfeld in Cabot Explorer, was flat in its first week in the portfolio – not bad considering the pullback in many other growth and tech titles. IBM is the world’s sixth-largest cloud infrastructure provider, and the cloud computing industry is expected to grow at a compound annual growth rate of 14% through 2030. The stock is a nice long-term addition to our portfolio. BUY

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was down about 2% on no news, so likely in sympathy with the broad market pullback. Earnings are due out April 18. 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. Eventually (though not in the just-completed quarter) the da Vinci 5 should be a financial windfall for the company, which is why investors have been snatching up shares this year, this past week notwithstanding. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, held its gains at new highs above 47 – an impressive feat in a down week! 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 most other valuation measures below the 5-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, held its ground, taking a well-earned breather after running up 13% through the first three months of the year. How important has MSFT become to the overall market? It accounted for nearly 1% of the S&P 500’s gains in the first quarter, second only to Nvidia (NVDA). No surprise those two names are at the top, since they’re the two artificial intelligence leaders. But there are many reasons to have MSFT in your long-term portfolio, and AI is just the latest – and perhaps most exciting – reason. BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, touched new 52-week highs after a mini-dip. JPMorgan’s Dough Anmuth raised his price target on the stock to 650 (it currently trades around 630), believing the streaming giant will continue its recent trend of accelerating revenue. The success of its new hit show 3 Body Problem is also helping move the needle. First-quarter earnings are due out April 18. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, continued its recent decline, falling from 128 to 126. Carl noted in his latest update, “The company and industry are coming under some scrutiny regarding the spread between its cost of production and price. There are an estimated 800 million people with obesity worldwide and only 2% of these patients are being treated.” That’s why NVO remains a Buy despite the recent weakness. The stock has nearly doubled since we added it to the portfolio. BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been threatening to break to new highs above 65 but keeps bumping into resistance. In his update last Thursday, Mike wrote, “NTNX pulled in with the rest of growth stocks over the past month, but this week’s test of its 50-day line (near 60) found support on Tuesday and Wednesday—obviously the type of action we want to see. The firm has been mostly quiet on the news front since earnings, with a partnership with consulting firm Wipro and an IP lawsuit against a firm that includes some former employees, but neither has moved the stock. Long term, there should be a very long runway of growth ahead here as more firms standardize on Nutanix’s platform, so we’re willing to give the stock every chance to keep going up, especially given that we’ve already taken some profits off the table. But like everything else, we’ll play it by the book near term—a drop into the high 50s could have us going to Hold, but with the stock still acting just fine, we’re OK grabbing some shares here if you’re not yet in.” We are too. BUY

Palantir Technologies Inc. (PLTR), originally recommended by Mike Cintolo in Cabot Top Ten Trader, held support in the high 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, kept holding at 66, at least in the aggregate. The stock is coming off a strong March (+11%) following a 15% increase in payments volume in the fourth quarter of 2023. Its first-quarter results will be released on April 30. BUY

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, got dinged on the negative Fed speak from last week, falling from 119 to 116. It’s still up 15% in the last two months, however. In his latest update, Mike wrote, “As interest rates have been testing multi-month highs and questions about the Fed’s future path come back into focus, PHM and other homebuilders hit a good-sized pothole this week, but like most names out there, the action was bad but not abnormal, with shares falling to their 25-day line and bouncing a bit from there. If interest rates really ramp up, it’s almost certain to be bearish, but rates remain a very long way off their peaks from last October, and the foundational factors in play in the housing market (limited supply, resilient prices) are pointed up. We’re not complacent, but the trend here remains up, both for the stock and for Pulte’s business, which we think can surprise on the upside. We’ll stay on Buy.” So will we. In fact, this modest dip creates a better entry point for those who aren’t yet in. BUY

Qualcomm, Inc. (QCOM), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, tacked on another couple points this week, and is back close to trading at its early-March highs. In his latest update, Tom wrote, “Qualcomm is secretly one of the best semiconductor and AI stocks to own. It had been held back by cyclicality, both in semiconductors and smartphones. But the negative cycle is ending, and AI is coming to mobile devices. QCOM cooled off over the past month after a huge rally in which it had risen 22% YTD and 65% since late October. It could bounce around for a while here. But the rest of the year looks strong as Qualcomm is also introducing new AI chips for PCs and smartphones and is well positioned for the next phase of the AI craze.” BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, had a nice bounce-back week, vaulting from 53 to 56 on no news. In his latest update, Carl wrote, “Sea Limited (SE) shares were up 6% in March as the company invested more in logistics in its home turf of Southeast Asia, where it has an edge. Sea Limited generated a record-high $13 billion in total revenue during 2023, led by its e-commerce segment with revenue growth of 24%. Digital payments revenue was up 44% but its gaming group, Garena, pulled back sharply, and its recovery is key to unlocking this stock’s potential.” BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, is right back at the top of its 740-to-780 range, running against the grain of the market last week. We have a solid 40% gain in 10 months on this reliable large-cap software stock. And it still looks buyable in its current range. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, seems to live at 172 these days. The lack of movement this week is actually a good thing, considering the electric vehicle giant reported a dud of a first quarter in terms of deliveries, which were down 8.5% – the company’s first quarterly delivery decline in four years. Coming on the heels of two weak quarterly earnings reports, the trends aren’t great, and it could be part of a larger consumer pivot from EVs to hybrids (hence the Honda addition today). Fortunately, the bad news seemed to have been priced in. And we’ll get a fuller picture of Tesla’s financials when it reports earnings in two weeks. For now, keep holding if you own some. Any move above the 170 range for the first time in more than a month would be a positive sign. HOLD

Tripadvisor (TRIP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down from 28 to 27 on no news. The travel stock has been virtually stagnant in the two months since it gapped up from 19 to 27. But 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, has lost momentum in the last month and is down from 81 to just under 75 during that time. Here’s what Mike had to say about it: “Uber (UBER) is close to a carbon copy (chart-wise) of many leaders, with a huge move into mid-February followed by a lot of chopping and testing since—but so far, intermediate-term support has held up. Business-wise, the firm is testing Uber Eats deliveries with autonomous vehicles for the first time (in Arizona), though that’s not going to affect much in terms of cash flow and bookings—the main draw here is a very bullish three-year outlook that should keep the major trend up. If the stock (and the market) powers ahead from here, we could actually add a few more shares to our position; on the flip side, a decisive breakdown here would have us at least going to Hold. For now, though, the evidence hasn’t changed, so neither will we—we’ll stay on Buy while keeping our eyes open for any change in character.” The stock has more than doubled in the 14 months since we added it. Keeping at Buy as well. BUY

Worthington Enterprises, Inc. (WOR), originally recommended by Bruce Kaser in the Buy Low Opportunities portfolio of his Cabot Value Investor advisory, was about even over the last week after a brief dip to 59. Here’s what I wrote about it in Cabot Value Investor last week: “Following the split-up of Worthington Industries late last year, ‘Enterprises’ focuses on producing specialized building products (42% of sales) and consumer products (48%). The value of these operations was previously obscured by the market’s perception that the original Worthington Industries was primarily a steel processor. While the market sees an average company with a mix of only partly related products, we see a high-quality company with strong positions in valuable and profitable niches, backed by capable management and a solid balance sheet.

“On March 25, Worthington reported fiscal third-quarter adjusted earnings of $0.80/share that were flattish (-1%) compared to a year ago but 16% above the consensus estimate of $0.69/share. This was the company’s first quarterly report following the split-up. The company initiated a recurring $0.16/share quarter dividend, which offers a 1% yield.

“Revenues slipped 9% due to a 19% decline in Building Products revenues as customers de-stocked their inventories. The two other segments, Consumer Products and Sustainable Energy Solutions, saw favorable revenue growth.

“Perhaps most encouraging was that profit margins expanded considerably. The gross margin increased to 23.1% from 22.8%, and the adjusted EBITDA margin widened to 21.1% from 20.0%, even as revenues slipped. This improvement is highly encouraging as it suggests that Worthington is more profitable than investors give it credit for.

“The balance sheet is fortress-like, with only $71 million in net debt, helped by $40 million in free cash flow and a $150 million cash distribution related to the split-up.

“Worthington’s headline results were highly encouraging, but commentary on the conference call suggests that the company faces some headwinds. It will take more favorable results and commentary in future quarters to fully convince investors that the company merits a higher valuation. Right now, they don’t appear to be convinced, as WOR shares are down 6% since the report and 3% in the last week.

“They have 21% upside to our 73 price target. The dividend produces a reasonable 1.1% dividend yield.” BUY

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 15, 2024.

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