Cabot Stock of the Week Issue: August 19, 2024

Stocks’ August redemption story continues, with the S&P on the cusp of being up eight straight days for the first time all year. What a turnaround from how the month started!

With the good times rolling, virtually every single one of our stocks was up this week, highlighted by an 80%-plus gain (!) in AST SpaceMobile (ASTS) and double-digit gains in about half a dozen other Stock of the Week holdings. With earnings season now behind us and summer drawing to a close, it’s reasonable to expect more static share prices until Labor Day. But you never know in this unpredictable summer.

The best course of action, therefore, is to strike while the iron is hot. And so today, we recommend a fast-growing company that is gaining market share in an industry that’s difficult to penetrate: coffee. It’s a stock that’s been on several Cabot analysts’ radar for months and was just recommended by Carl Delfeld in his Cabot Explorer advisory last week.

Here it is, with Carl’s latest thoughts.

Dutch Bros Inc. (BROS)

The financial media has been full of stories about coffee king and premier brand Starbucks’ (SBUX) struggles with overall weak sales leading to some quarterly losses.

Starbucks’ U.S. sales have been crippled by slowing consumer spending and people working remotely as well as competition from local boutique coffee roasters. Comparable sales declined worldwide as its prices are high relative to faster-growing competitors in America and abroad in China.

Compounding the challenge is that Starbucks has made a major bet on China’s emerging coffee market where the economy is weak and competitors are emerging left and right. All this led to a pullback in Starbucks (SBUX) stock and a historically low valuation.

I was planning this week to add Starbucks as an Explorer Dominator stock. But on Tuesday, Starbucks shares surged on news that the company will soon have a new CEO – Chipotle’s popular leader, Brian Niccol. The market is betting that his savvy marketing skills will “create brand buzz” for Starbucks and produce a new look at its strategy.

Given the 20% jump in Starbucks stock following the announcement, let’s consider two smaller coffee competitors that present us with a classic conundrum between a dominating company such as Starbucks or disruptive competitors growing much faster and offering cutting-edge, distinctive strategies, as well as lower prices.

One such upstart is Luckin Coffee (LKNCY).

Luckin has more of a kiosk, delivery, and technology-driven retail strategy blending quality, high convenience and high affordability. Sales were up 41% in the first quarter as it opened more than 7,000 outlets in 2023 – equal to the total number of Starbucks in China. The company also boasts prices that are roughly half of its premium Starbucks competitor.

Luckin Coffee was founded in 2017 and started out of the gate fast only to run into some serious accounting and management problems. After regrouping, it has resumed a torrid growth trajectory. The company opened 2,342 new stores, including two in Singapore, in just the first quarter of this year.

China’s languid economy and stock market make Luckin Coffee a speculative pick so let’s consider a stock a bit closer to home.

A smaller disruptive coffee chain, Dutch Bros (BROS), has demonstrated some impressive growth over the last few years. The company follows to some degree the asset-light, internet-focused convenience of the Luckin model – without the China risk.

An operator and franchisor of drive-through coffee stores, the company has about 900 locations across 17 states in the U.S. Dutch Bros has seen its share price soar but, in the last month, its stock has pulled back from 42 to 29 due to a combination of some profit taking and guidance from management that growth may moderate a bit.

Revenue soared by 92% from 2021 to 2023 and, after some heavy losses, Dutch Bros was able to manage a small net income of $1.7 million for 2023. Dutch Bros looks well positioned to continue growing as the company plans to open between 150 and 165 new stores this year.

With strong brand recognition from its member rewards program along with two successful product launches during the most recent quarter, Dutch Bros looks like a stock you may want to keep for the long term.

Dutch Bros has more than 900 stores as of the end of the second quarter, including 36 that it opened in the quarter. It’s expanding at a steady pace, expecting up to 165 new stores this year, and it envisions up to 4,000 stores over the next 10 to 15 years.

Customers like its concept, which is why it has been able to successfully open many new stores. Total revenue increased 30% year over year in the last quarter. It’s steadily increasing profitability as well. Net income increased from $9.7 million last year to $22.2 million this year.

Something I didn’t even realize right away is that Dutch Bros only recently rolled out mobile ordering. It was live in 38 stores in the second quarter and is already live in 200 more since then. I find it impressive that it was growing fast without a mobile feature, and this should be a strong new growth driver going forward.

Growing pains are normal for younger growth companies so management must be at the top of their game. New CEO Christine Barone has been there for about a year, and she has completely rebuilt the C-suite.

I see this situation as an opportunity to buy Dutch Bros (BROS) on the pullback before the stock potentially climbs much higher. BUY

Current Recommendations

Changes Since Last Week: None

No changes to the portfolio for a second straight week, as everything is simply performing too well to cut any positions loose. Nearly all of our 25 pre-existing stocks were up in the last week, many of them substantially so (see ASTS, below). Not one of them was down more than 1% since our last issue. More than a handful are trading at fresh 52-week or all-time highs.

So, let’s dig in. Here’s what’s happening with all our stocks in the midst of a red-hot 10-day stretch for the market.

Updates

AST SpaceMobile (ASTS), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, has gone to the moon (sorry for the bad pun)! Shares of the upstart satellite internet company were up 50% (!) in one day last Thursday ahead of next month’s expected launch of its first five commercial satellites; if successful, they would be the largest communications commercial arrays in low-Earth orbit in history. The satellites have arrived at the Cape Canaveral launch site, the company revealed. The company is developing a space-based cellular network that will provide global broadband service to every smartphone, starting with the U.S. It’s a big-swing, potentially revolutionary idea, and thus the excitement now that the first launch is less than a month away is palpable. Of course, there’s always the risk that the launch will get delayed, which could send shares tumbling. So, considering that the stock has already tripled in just over a month, I recommend booking some profits now by selling up to a third of your original position. Let the rest ride. For those who have not yet bought and are considering new positions, I would start small and only on dips on the heels of such a massive run-up for the stock – and with no new catalysts forthcoming until next month’s launch. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, reported earnings last Wednesday that were very solid.

The London-based life insurance and investment management provider reported first-half (rather than quarterly) 2024 results, with operating profits of £875 million, up 14% from the first half of 2023 and ahead of analyst estimates. Insurance premiums increased 15%, which helped, as did a 49% boost in its protections business thanks in large part to the company’s acquisition of AIG Life earlier this year.

The strong quarter prompted this note from Jefferies analyst James Pierce: “Aviva continues to demonstrate strong delivery versus its targets, beating consensus expectations across all its headline metrics. In our view, Aviva remains the only U.K. insurer that can reliably deliver long-term special capital returns, accretive M&A (mergers and acquisitions), attractive ordinary dividend growth, and consistent earnings-per-share growth.”

“Consistent” is precisely how I would describe the company and the stock. AVVIY shares are up 4.5% since our last issue and closed last Friday at a new 52-week high above 13! And yet the stock remains cheap, trading at a mere 12.8x earnings estimates and 0.35x sales. The stock is nearing our 14 price target in Cabot Value Investor, though given the latest earnings growth, it’s possible I’ll need to raise that target.

The growing and high-yielding (6.7% yield) dividend adds to Aviva’s appeal – and our total return thus far. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, tacked on another few points this week, rising from 129 to 134 as the post-carry-trade market recovery continues to do wonders for this Bull Market Stock (Mike’s term). As long as the bull market remains intact, this stock – which tends to outperform in bull markets (and we have the 27% one-year return to prove it!) – will remain in our portfolio. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, had a very good week, up more than 11% on no major news. After falling 20% over a two-month span that extended from late June through the first week of August, AVGO shares are back with a vengeance, recovering most (though not all) of those losses. The company’s artificial intelligence offerings likely provided a floor for the share price, at least in the short term. Now that the market is back in gear, AVGO has resumed its uptrend, though we’ll see if it can top the previous high around 183. HOLD

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, was up 10% to reach new all-time highs above 99 ahead of earnings this Thursday, August 22. It’s possible an earnings miss could rain on the stock’s parade, especially since expectations are high: Analysts are looking for 26% sales growth and for EPS to double to 12 cents from six cents a year ago. Given the quick bounce-back to new highs, it’s tempting to upgrade this stock back to Buy now, but let’s wait until after the earnings report. Hold for now. HOLD

Dick’s Sporting Goods (DKS), originally recommended by yours truly in my Cabot Value Investor advisory, was up nearly 10% on no company-specific news, though last week’s better-than-expected July retail sales report (+2.7%) surely helped. Dick’s has been one of the more resilient, reliable growth machines in the retail space for the better part of a decade, with sales improving from $8 billion to just under $13 billion from 2016 to 2023. They’re expected to reach $13.5 billion this year. And yet, the stock remains somewhat undervalued, trading at 16x earnings estimates and at 1.44x sales. In Cabot Value Investor, I have set a 250 price target, which is starting to look conservative. To get there, however, the stock will need to break above 230, which has acted as resistance for months. Regardless, it’s off to a good start for us. BUY

DoorDash Inc. (DASH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up more than 3% in its first week in our portfolio. The burgeoning online food delivery power announced a new partnership with the Warner Bros. Discovery streaming service Max in which a Max subscription will be offered to anyone who signs up for a DashPass Annual membership. But as Mike wrote last week, “The real potential here is DoorDash expanding into other verticals, allowing people to get groceries, beauty supplies, home improvement goods, alcohol and more delivered to their homes using the firm’s app; while the company said it’s gaining share in the restaurant field (more than half of new restaurants that sign up for a delivery partner choose DoorDash), it’s the same for other non-restaurant clients as well, where business is ramping steadily. Throw in a growing ad business (obviously its app and marketplace are a huge source of eyeballs) and results remain excellent: In Q2, order volume lifted 20%, revenue grew faster (up 23%) as the take-rate moves up (13.3% of marketplace volume), while EBITDA is booming, totaling $430 million, up a huge 54%.”

DASH shares are up 29% year to date but are down from their April highs above 140. Even after a forceful bounce after the stock bottomed at 100 a month ago on the heels of a painful multi-month drawdown, there’s still plenty of upside here. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was up another 3% this week as the stock continues to ride the momentum of another very strong quarter. Here’s what Tom had to say about it in his latest update: “You can always count on LLY. It never stays down for long. The stock was upgraded to a BUY last week and has moved 17% higher since. The catalyst was a blowout earnings report that obliterated expectations as sales of its weight loss and diabetes drugs soared well beyond even the loftiest expectations. It also raised full-year guidance by many billions. Lilly … was able to produce enough of its new mega-blockbuster drug to meet demand. These drugs are just getting warmed up and the recently approved Alzheimer’s drug is expected to achieve peak annual sales of around $5 billion. And there are more great drugs in the hopper. Meanwhile, the drug-consuming population gets older still every day.” We have a 175% gain on LLY in a year and a half, and yet I think there’s way more upside ahead. BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, just keeps hitting new record highs! Shares are up from 158 to 163 since we last wrote and are up more than 10% since reporting another strong quarter two weeks ago. Earnings per share came in at $1.10, edging estimates and up 76% year over year. Revenues of $1.12 billion only beat estimates by one percentage point but marked a 7.3% improvement from the same quarter a year ago. Average revenue per user ($210) increased 5.5%. The company started to draw investor interest last fall when it announced a new AI-powered solution, Airo; now it’s helping drive revenues in a tangible way, having introduced Airo to its existing 20.9 million users. It’s currently available for web domain purchases in English-speaking countries but with further expansion into 90 other markets later this year. That AI angle is what initially drove the stock, and now it has the numbers to back it up. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, is up marginally since we last wrote, though the stock is well clear of its early-August bottom just above 10. In his latest update, Michael wrote, “Green Thumb reported second-quarter revenue of $280 million, an increase of 11% compared to the same quarter a year ago.

“Revenue growth was driven by increased retail sales and the addition of 11 RISE stores. Comparable sales (stores open at least 12 months) increased 2.3%. The company experienced continued price compression.

“Gross profit was $150.5 million or 53.7% of revenue compared to $125.3 million or 49.6% of revenue the year before. It reported adjusted EBITDA of $94 million, and $20 million in operating cash flow. Net income was $20.7 million or $0.09 per share, compared to $13.4 million and $0.05 per share. Cash at the end of the quarter was $196 million.

“The company bought back 1.6 million shares for $20 million. It has $27 million left in its buyback plan.

“Unlike many other cannabis companies, Green Thumb is playing it safe on taxes. It is continuing to follow IRS Rule 280E, which means it does not deduct operating expenses. ‘On June 28, the IRS issued a statement that made it clear that cannabis companies were obligated to pay taxes under 280E while cannabis remains a schedule one controlled substance,’ cautioned CEO Ben Kovler.

“The company has been investing to expand in Florida and Connecticut. Looking ahead to the rest of the year, it will invest to expand in Florida, Nevada, Minnesota, Pennsylvania and Virginia. Most of those states may soon launch rec-use sales.” HOLD

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was up another 3% this week to reach new all-time highs near 480! The only news was that Johnson & Johnson (JNJ) announced a possible competitor to Intuitive’s da Vinci robotic surgical system – called Ottava – though details are limited at this point. The announcement did little to dampen investor enthusiasm for Intuitive, which is drawing strength from the rollout of its newest da Vinci 5 model. The company sold 70 of them in the second quarter, up from eight in the first quarter. BUY

iShares MSCI India Small-Cap ETF (SMIN), originally recommended by Carl Delfeld in Cabot Explorer, added another point this week, rising from 81 to 82, and is off to a good start for us. SMIN is a $988 million fund that holds a basket of about 500 small-cap India stocks. It is nicely diversified with the top 10 stocks accounting for just 12% of assets. The lead sector is industrials at 25%, followed by finance at 15%, consumer goods at 14%, basic materials at 13% and healthcare at 10%. It’s a great, high-upside way to play the fastest-growing major economy in the world. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, was flat at 49 this week after rebounding from 47 following earnings the previous week. In his latest update, Tom wrote, “Main Street reported earnings … that met market expectations. The BDC also reiterated its monthly dividend of $0.245 per share for the rest of the year and announced an additional $0.30 per share supplemental dividend payable in September. The BDC also has a lot of small business exposure, which is problematic during recessions. MAIN stock has recovered from last week’s selloff and is only down about 5% in August after having been in an uptrend since last fall. A recession would certainly change the dynamics. However, solid earnings and reduced recession expectations are resulting in the stock regaining lost ground.” BUY

McKesson Corporation (MCK), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was flat this week after a sharp fall-off the week before in response to a weak earnings report. In his latest update, Tom wrote, “This healthcare juggernaut showed a kink in the armor. Earnings disappointed and the stock plunged 11% in one day. Ouch. The report actually exceeded earnings expectations but missed on revenues. The company cited several factors for the miss including a shift to biosimilars for Humira, a fall in demand for covid tests, and a slow pace of new drug launches for the quarter. But its peer companies didn’t have these issues. It’s likely a temporary blip and McKesson raised guidance for the full year.

“Even after the fall, MCK has obliterated market returns in every measurable period over the last five years including three- and five-year returns of 185% and 303% compared to S&P returns of 21% and 87% over the same periods, respectively. MCK is also still up 20% YTD. A stock that dominant can’t miss anything in this market without getting punished. I believe MCK will slowly return to a new high in the months ahead while the rest of the country focuses on politics.” I believe MCK will bounce back as well, especially now that it appears the worst of the selling is behind it. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, continues its steady recovery from a steep decline in July and early August, adding another 3% this week. There’s been no major news, though MSFT (along with NVDA and other artificial intelligence powers) has been shaking off the cobwebs from the swift but strong selloff in all things AI in late July and early August. Regardless of its week-to-week and even month-to-month gyrations, there are few better long-term growth investments than Microsoft, and it’s a core holding in our portfolio. BUY

Neo Performance Materials (NOPMF), originally recommended by Carl Delfeld in his Cabot Explorer advisory, recovered about half its late-July/early-August losses in the last week, bouncing off support just under 5 to reach the mid-5s as of this writing. The rare earths miner reported mixed earnings results in early August. Revenue declined 37% year over year, though net income improved 177%, earnings per share more than doubled, and the profit margin was up four-fold, from 2 cents a share in Q2 a year ago to 8 cents a share now. The revenue number missed estimates by 20%, while EPS (2 cents a share) fell short by 76%, so this wasn’t quite the quarter Neo was hoping for. But there was enough in the report for investors to like that the stock has been mostly on the upswing since. We downgraded it to Hold after the stock’s sharp pullback in the second half of July and will keep it right there for now. HOLD

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, has nearly recovered all of its July losses, advancing more than 7% this week after rising 5.5% the week before. Recent news that the streamer will produce its first live sporting event this year – Christmas Day NFL games – may have helped move the needle a bit. But more than anything, shares were oversold following another strong quarterly report as both earnings per share and revenue topped estimates; sales improved 17% year over year, and the company raised full-year guidance slightly; and membership of its new ad-supported service expanded by 34% year over year. That’s helped the streaming giant become more profitable, as EPS came in at $4.88, up 48% from the $3.29 it earned in Q2 a year ago. Like MSFT, NFLX is a “must-have” for any long-term growth portfolio. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, is up 4.5% in the last week as the stock continues to get a bump from its latest earnings report. Novo’s total sales grew 24%, and the company hiked its outlook for the year; it now expects 22% to 28% revenue growth in 2024, up from 19% to 27% previously. Ozempic sales ($4.26 billion) – while up 30% year over year – trailed the $4.38 billion consensus estimate. Its other weight-loss drug, Wegovy, saw a 69% year-over-year sales bump to $1.88 billion, but that too trailed estimates ($1.96 billion). Still, the numbers have been good enough to convince Wall Street to dive back into shares of the Danish drugmaker after they fell out of favor in July and early August. We haven’t wavered from our Buy rating, and NVO is back to being a double for us. BUY

Ollie’s Bargain Outlet (OLLI), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, righted the ship in a big way after dipping as low as 86, clawing its way back to 98. The encouraging July retail sales report likely had the most to do with the stock’s turnaround. Another potential catalyst looms for the discount retailer, as the company will report earnings on August 29. BUY

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, has gotten a nice boost since reporting earnings last week, bumping up from 39 to 42. In his latest update, Mike wrote, “On Holding (ONON) reported a solid second quarter, with currency-neutral revenue growth of 29% (bolstered by Asia-Pacific revenues up 74%, while apparel sales boomed 67%), while EBITDA lifted 45% and margins continued to expand (EBITDA margin up to 16% from 14.1% a year ago). Those numbers were just above or below expectations, which caused the stock to initially wobble, but management sounded a confident tone for the second half of the year (reiterated 30% currency-neutral revenue growth, which implies some acceleration in Q3 and Q4) as recent issues have mostly surrounded the Swiss Franc and some one-time transitions to a bigger manufacturing facility. Shares have risen since the report, though like so many things, ONON is still battling with resistance in the 42 to 44 area. Overall, we like it, and a breakout could be very bullish, but we’ll be prudent and stick with our Hold rating given the chart and the still-tricky environment.” We have maintained a Buy rating and will keep it right there as the market environment seemingly becomes less “tricky” by the day. BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is up more than 20% to reach a new 52-week high! The catalyst was earnings, reported last Wednesday. Revenue was $3.8 billion, up 23% year-on-year, and net income was $79.9 million. All three of Sea’s major segments – Garena (gaming), Shopee (e-commerce) and SeaMoney (fintech) – are moving in the right direction, with all three reporting revenue growth that exceeded 20% in the latest quarter. That kind of across-the-board growth makes Sea Limited an excellent catch-all for Southeast Asian economic growth. Best of all, shares of the Singapore-based conglomerate still trade at just a fraction of their 2021 highs. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, bounced back nicely last week, up more than 10% after a big post-earnings dropoff had taken shares back below 200. There was no major news. We narrowly maintained our Buy rating a week ago on the premise that the worst of the selling was nearing an end, and it appears that was the case. The stock is still down 11% year to date but is up 57% since bottoming at 142 four months ago. So, it has momentum, although the recent ups and downs have been a bit dizzying. Hopefully shares can stabilize a bit in the coming weeks as the company enters something of a slow news cycle now that Q2 earnings (disappointing again) are firmly in the rearview mirror. BUY

UnitedHealth Group Inc (UNH), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was up 3% and is nearing its early-August highs. The stock reached a new stratosphere after reporting strong earnings results that beat estimates a few weeks back. It’s a defensive stock, but one that has gone against the market’s grain since the start of July, advancing more than 18% since. It’s an all-weather, reliable mega-cap healthcare stock with the never-ending tailwind of an aging U.S. population. BUY

United States Steel Corporation (X), originally recommended in the Cabot Turnaround Letter, is down slightly in the last week after touching four-month highs above 41. There was no news as we await news on whether its planned sale to Nippon Steel gets done. There’s growing optimism that it will, so we’ll maintain our Buy rating on the age-old premise that it pays to have takeover targets in your portfolio. BUY

Viking Holdings (VIK), originally recommended by Mike Cintolo in his “Best Stocks to Buy in August” report, was up 6% ahead of today’s earnings report, which doesn’t come out until after the market close – and thus after this issue is published. Analysts anticipate $1.43 billion in revenues with $0.65 in earnings per share for this river cruise line specialist. We’ll see how the real numbers compare. 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 August 26, 2024.

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