Cabot Stock of the Week Issue: August 21, 2023

Is it September yet? Sheesh! August has been a constant stream of cold water determined to douse the bull market fire that was sparked in June and July. As of this writing, the S&P 500 is down 4.6% this month, while the Nasdaq is off 6.6%. And there are still 10 days to go in the month.

Things that weren’t a concern a month ago (Earnings blowups! Bond yields! The Fed!) are now front of mind again for investors, as it seems the sellers are looking for any ammo to get to work after the monster first-half rally this year. A couple things to remember: 1) Pullbacks are normal, especially after big run-ups like the one we experienced in June and July; in fact, dating back to 1950, the average correction after a 15% gain in the S&P 500 is 8.2%; 2) August and September are the two weakest months on the investment calendar, historically, so the selling may continue once Wall Street returns from its late-summer getaways to the Hamptons and starts selling out of some of their long-neglected laggards.

What to do until the selling stops? Take advantage of the pullback by investing in good companies at discount prices. The long-term trend is still up (both the S&P and Nasdaq are up double digits for the year), and new bull markets like this one rarely up and fizzle within a matter of months. But growing pains are normal. I’m not saying bury your head in the sand and do nothing while your portfolio goes up in smoke – if you have positions that are in freefall and/or weighing down your overall return, sell them. (We’re selling two such stocks today, in fact). But I also wouldn’t be afraid to do a little buying either, knowing the odds favor higher prices by year’s end, or sooner.

With that in mind, today we add another big-idea stock that is a leader in a very large sector. It was an early-Covid darling but now trades at less than a quarter of its 2021 peak. And yet, the stock has momentum, up 53% year to date, with an expected rebound in both the top and bottom line coming in 2024. It’s a name that Tyler Laundon has been circling of late and that he just added to his Cabot Early Opportunities portfolio.

Here are Tyler’s latest thoughts on it.

Zillow Group (ZG)

After an incredible run during the pandemic, home sales have come way down, partly due to higher prices and mortgage rates, and partly due to lack of supply.

The correction has been rough on companies that rely on transaction volume to fuel their businesses. And while it’s very unlikely there’s going to be a massive surge in home sales in the near future, it’s very possible that the worst is behind us.

Zillow (ZG) represents a way to play rebounding home sales transaction growth in 2024. There’s also a compelling self-help story as Zillow is taking steps to capture more of the transaction market.

Stepping back, Zillow is undoubtedly the top dog in the online real estate advertising market.

The company owns the most visited real estate web property in the country, Zillow.com, through which home buyers can search for homes to buy or rent, get connected with agents and brokers, and secure financing. It owns other brands as well (Zillow Rentals, Trulia, StreetEasy, Zillow Closing Services, HotPads and Out East)

Zillow also offers a variety of marketing and technology tools for the real estate industry (Mortech, dotloop, Bridge Interactive, New Home Feed and ShowingTime).

Putting all the pieces together, Zillow’s platform helps streamline transactions related to buying, selling, financing, renting, etc. These transactions total around $300 billion every year.

Back in 2021, Zillow captured around $4,000 when it got a buyer referral. Management thinks it can capture closer to $5,200 per deal over the coming years by working on the financing, seller services and closing services parts of a deal.

The company just put out Listing Showcase, a subscription product for agents that falls under its ShowingTime+ solution. Showcase will help agents boost their listings and brand and features high-res images, room photo organization and better visibility for home shoppers. Early reports say there are over 8,000 agents currently waitlisted.

With home sales expected to be around 4.2 million in 2023, there’s no doubt it’s a soft market. But it will recover, and Zillow has a lot of leverage, so shares will move quickly on any positive (or negative) news.

Expectations are currently low. Analysts see revenue of about $1.9 billion this year, a whopping 69% decrease as compared to 2022. But 2024 looks better with 13.5% revenue growth expected.

EPS this year is seen at around $1.03, down 35% as compared to last year. But EPS should improve next year when analysts see EPS of $1.36 (+32%).

And things are already improving: In the second quarter (reported on August 2), Zillow beat on both the top and bottom lines, delivering revenue of $506 million ($33.4 million more than expected) and EPS of $0.39 ($0.20 more than expected).

Residential revenue fell 3% but did better than the broad market and beat analyst expectations while rental revenue grew by 28%, also beating expectations.

As for the stock, ZG came public in 2011 at (split adjusted) 6.2 and, like the housing market, is prone to big runs and good-sized pullbacks. Shares peaked at 51.4 in mid-2014, 65.4 in mid-2018 and 212.4 in early 2021. The ‘21-22 correction was as painful as they get. ZG suffered through a roughly 87% correction. Shares have acted much better this year. The stock broke above 40 in early January and has walked up into the low 50s since. It’s pulled back the last couple weeks along with most stocks, but still trades well north of its 200-day moving average (albeit below the 50-day) and is up 58% year to date. If shares can stabilize in the coming days, it’s a great starting point in a stock that was overly beaten down and may be getting a second life.

Current Recommendations

Changes Since Last Week:
Las Vegas Sands (LVS) Moves from Hold to Sell
Shopify (SHOP) Moves from Buy to Sell

We have two more sells this week, as LVS and SHOP have broken below key support and we’re not willing to wait for either to find a bottom. But considering how fast and furious the selling has been this month, most of our portfolio is holding up quite well. Some – CMCSA, LLY, NOPMF, NVO, to name a few – are thriving. That bodes well for when the buyers return, which they will … eventually.

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

Updates

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, was about even this past week despite reporting strong first-half earnings last Tuesday. Operating profits improved 8% year over year, beating analyst estimates, and the company anticipates full-year operating profit growth to come in between 5% and 7%. The London-based insurer also saw a 58% increase in health insurance sales, though that’s only a small portion of total revenues. The stock got an initial 2.5% bump before pulling right back near its August lows, which it is re-testing for a third time. A dip below about 9.60 could have us reassessing, but for now, we’ll keep on Buy, although I’d recommend only a nibble if you haven’t already bought. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is up a point in the last week after putting in a bottom in the 96 range. BX is a bull market stock, which is both a blessing and a curse: When the bull market is raging, like it was in June and July, BX shares tend to soar. When the market flounders, like it has in August, shares sink. Since I expect the bull market to resume soon (no new bull market this century has up and fizzled within a matter of months), I still like BX as a way to play it, and the fact that it’s been up the last two trading days is a good sign. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was down about 1% this week, though it’s up sharply this morning. In his latest update, Tom wrote, “The AI juggernaut is finally showing a little bit of weakness. After a huge surge in May and June AVGO made a new home at the top of the recent range. As the overall market has weakened it has pulled back slightly, but remains entrenched in the higher range. If there is further weakness in the weeks ahead, I will add back that one-half position as the longer-term prognosis remains excellent.” As for us, we’ll keep it on Buy. BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, keeps falling on bad economic news coming out of China – the central bank slashing interest rates to stimulate a sluggish economy; youth unemployment north of 20%; top real estate firms filing for bankruptcy, etc. But none of that has anything to do with BYD. In fact, BYD’s ability to make money hand over fist – revenues tripling in 2022 and rising another 72% in the first half of this year – in spite of a weakened Chinese economy is actually more reason to like it, in my opinion, especially now that the EV giant is expanding globally (India, Japan, Brazil, Europe, etc.). This has been a very rough August for the stock since BYDDY shares topped 71 at the end of July, but I have full confidence it will be back once the negative headlines regarding the Chinese economy pass and once the market in general finds its footing again. If you have not yet bought the stock, you can either start with a small position here, or wait for it to put in a solid bottom if you want to open up a more substantial stake. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, is finally pulling back a tad after weeks of gains in the face of a substantial market retreat. But overall, shares haven’t budged much since we last wrote. In his latest update, Bruce wrote, “Comcast was the subject of a favorable article in Barron’s this past weekend. The article included favorable (not surprising) comments from the company’s leadership but also an endorsement from Craig Moffett at research firm MoffettNathanson. Moffett is a highly regarded telecom/cable analyst and one of the few who deeply understands the economics of the industry. The gist of the article: Comcast’s growth opportunities, including residential internet service and mobile wireless, along with its parks, studios and other businesses, more than offset the dying cable business, while threats from rival fiber optic networks and 5G fixed wireless are fading. The article also covers the option value that comes with Comcast’s Hulu stake, which will likely be acquired by Disney next year at a high price. The article doesn’t discuss the downside if Comcast decides to buy out Disney’s stake, which could potentially be a massive $40 billion purchase, even if this is a remote possibility.

“Comcast shares … have ticked above our 46 price target. We are re-evaluating this target and our rating in light of the strong earnings report.” BUY

DoubleVerify (DV), originally recommended by Mike Cintolo in Cabot Growth Investor, appears to have put in a bottom at 31, and has been putting together a nice “launching pad” (a Mike Cintolo pet phrase) in the last 10 days, which may bode well if the market can get its act together soon. In his latest update, Mike wrote, “DoubleVerify (DV) has finally stopped going down, outperforming the market a smidge in the past few sessions. That’s hardly a reason to celebrate, though we’re going to hold our small-ish position a bit longer—shares found support right where they were ‘supposed to’ (near the prior breakout area), and if they can hold up a bit longer, we think a solid bounce is possible. Our leash is very tight, but at this point, we’ll hold the rest of our DV and see if the nascent rebound can continue.” We downgraded to Hold after the big downmove a couple weeks ago and will keep it right there. But the recent action is encouraging. HOLD

DraftKings (DNKG), originally recommended by Mike Cintolo in Cabot Growth Investor, is having a rough month, down about 15%. Most of those losses came after rival Penn Entertainment (PENN) announced a $2 billion, 10-year deal with ESPN. Still, the overall trajectory is decidedly up, with shares having more than doubled year to date. In his latest update, Mike wrote, “DraftKings (DKNG) … was hit hard following the Penn National/ESPN deal, and it’s dipped further since (albeit on very light volume). What’s interesting is that PENN is also weak, giving up all of its deal-induced pop and more. Let’s not forget that Q2 displayed the true potential of the company, with still-massive revenue growth and positive EBITDA—it looks like a rapid, reliable growth story that should play out for a long time.” We just added DKNG to the Stock of the Week portfolio last Monday, so our losses are mild thus far. I fully expect it to bounce back once the market gets in gear, given the strength of its second-quarter results. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, just keeps hitting new all-time highs! Shares were up another 1.8% this past week despite another down week for the market, and we now have a 65% gain on the stock in exactly five months. Stellar earnings were the latest catalyst, as revenue improved 28% year over year while earnings per share expanded by a whopping 85%, while the company also raised full-year guidance. Its diabetes drug Mounjaro, which is pending FDA approval this year for weight loss, sold $1 billion in the quarter versus a projected $740 million. The company also expects FDA approval for its blockbuster Alzheimer’s drug Donanemab later this year. It’s all coming up aces for Eli Lilly. Two weeks ago, I advised selling a few shares (perhaps a quarter position) if you got in early after our late-March recommendation and downgraded the stock to Hold. We’ll keep it at Hold for now, but it just keeps defying our expectations. HOLD

GitLab (GTLB), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down another point this past week, but appears to be settling down, and the 200-day line has acted as clear support. Earnings are due out September 5. GitLab provides a source code management (SCM) platform with a host of collaboration, sharing and tracking tools for software developers. The company could be an acquisition target, is an AI play, and trades at less than half its November 2021 highs (125), so I still like it despite the recent weakness. BUY

Las Vegas Sands (LVS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down another 5% this week and is hitting its lowest point since March. This casino operator does much of its business in Macau, and right now all things China are taking it on the chin as its economy struggles to gain its footing after Covid lockdowns. As such, I think it’s time we said goodbye to LVS. I still like it long term, but given China’s sluggishness, it’s hard to rationalize having two China-centric stocks in the portfolio, and I like BYD’s prospects more at the moment. And at least this way we get out while we still have a small gain on the stock. MOVE FROM HOLD TO SELL

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, was off about 1.5% this week, roughly in line with the market. There was no stock-specific news. This looks like a normal pullback for a stock that was among the handful of mega-cap techs that led the market out of its bearish doldrums the first half of the year and is still up 33% year to date (we have a 24% gain on it). I still like it as a leader of the artificial intelligence boom, though the AI frenzy has cooled off of late. It will be back, and so will MSFT. BUY

Neo Performance Materials Inc. (NOPMF), originally recommended by Carl Delfeld in Cabot Explorer, kept on rising after a nice earnings gap the week before. In his latest update, Carl had the details on the company’s solid quarter: “Revenue was slightly higher and adjusted net income was $2.5 million in the quarter, or $0.05 per share. Its cash position was about $126 million. Neo manufactures advanced tech and industrial metals and materials such as magnetic powders and magnets, specialty chemicals, metals, and alloys – all using rare earths and critical metals.” BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, tacked on another 3% this week after gapping up 17% in one session the previous week on solid data from its Wegovy trial. The drug demonstrated that it reduced heart attacks, strokes and cardiovascular deaths by 20% compared to a placebo drug in its current five-year study. Also, as Carl wrote in his latest update, “The company recently announced strong results for the first half of 2023, with net sales climbing 30% year over year and a 43% increase in net profit, or around $1.61 per share. Novo Nordisk raised its full-year 2023 outlook to call for sales growth of 27% to 33%.” We now have a 38% gain on the stock. If you bought early, it’s a good time to book profits on a few shares. Otherwise, we’ll keep it at Buy. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, was down 3% this week after seemingly stabilizing the week before. There was no news. The company is coming off a strong quarter in which adjusted EPS was up 46% year over year (and ahead of estimates), while revenues improved by 22.7%. But because the stock was up big headed into earnings, it was one of many high-flying growth stocks that fell apart despite beating estimates. So the recent selling seems unwarranted, and I expect NOW will bounce back soon. BUY

Shopify Inc. (SHOP), originally recommended by Tyler Laundon in Cabot Early Opportunities, continues to bleed lower, and is now 25% off its mid-July highs. With no bottom in sight, let’s step aside from this e-commerce giant, which has a good story as it expands from small customers to bigger fish, but the stock looks sick now, so let’s not stick around until it’s nursed back to health. MOVE FROM BUY TO SELL

Si-Bone (SIBN), originally recommended by Tyler Laundon in Cabot Early Opportunities, is flat in the past week, and appears to have bottomed two weeks ago on the heels of a post-earnings selloff. Like many growth companies that have fallen sharply of late, the earnings were good: Revenue improved 30% year over year and beat estimates by $2 million, while per-share losses (the company is not yet profitable) beat analyst estimates by a penny. Also, the company raised full-year revenue guidance by $3.5 million. The bleeding appears to have stopped for this small-cap MedTech stock which specializes in treating patients with sacroiliac (SI) joint pain/injuries – specifically, it develops an innovative, patented implant to fuse the SI joint. BUY

Terex (TEX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has given back every bit of its earnings gains from earlier this month, down more than 8% since we last wrote. There was no news for this manufacturer of materials used in the construction industry to warrant the sudden sell-off. The quarter was impressive: Adjusted EPS of $2.35 blew analyst estimates ($1.61) out of the water and was a 120% improvement from the same quarter a year ago. Revenues increased 30% year over year. The company also raised full-year 2023 guidance. With the stock trading right around June and July support, I’ll keep TEX at Buy for now. But a dip below could necessitate a downgrade. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, kept falling, down another 5%, though it’s bouncing nicely today. A bullish note from Baird analyst Ben Kallo seems to have sparked today’s turnaround, as the analyst highlighted several upcoming catalysts for the company. Those include the possible launch of the long-awaited Cybertruck in the current quarter, plus the debut of its new Highland Model 3 in China, with production set to begin in September. Today at least, those on-the-horizon developments are helping TSLA shares recover some of their recent losses, some of which are surely a result of the economic weakness in China, where Tesla has been making large strides of late. Kallo maintained his 300 price target on TSLA, while Wedbush analyst Daniel Ives called the August pullback in shares “an opportunity.” So, we’ll keep it at Buy. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, has become one of the more reliable stocks in our portfolio, holding firm in the 43-44 range the last couple weeks despite the continued selling among most other growth titles. Mike wrote as much in his recent update: “Uber (UBER) remains one of the relatively few growth-oriented names that is acting normally—not amazingly well, of course, but pulling back to the 50-day line area on light volume. Obviously, if the economy implodes, all bets are off for just about every company, but barring that, there’s little doubt that Uber should see soaring EBITDA and free cash flow in the quarters to come. Of course, good tidings haven’t mattered much in this market, and if UBER sinks much from here, we could trim our position. But all told, the odds still favor the next big move being up. Hold on if you own some, and if not, you could start a small position around here.” What he said! BUY

If you have any questions, don’t hesitate to email me at chris@cabotwealth.com. You can also follow me on Twitter, @Cabot_Chris.

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 28, 2023.