Cabot Stock of the Week Issue: August 28, 2023

The market had its first decent – or at least “not bad” – week all month, as the S&P 500 is up marginally since we last wrote. We’ll take it! This being the unofficial last week of summer before next week’s Labor Day-shortened grand return, I wouldn’t expect much movement prior to our next issue either. Thankfully, last week’s two big events – Nvidia’s earnings (impressive) and Jerome Powell’s Jackson Hole comments on all things economy, inflation and interest rates (a bit more hawkish than people would have liked) – essentially canceled each other out, and stocks maintained equilibrium as a result. With earnings season over and no major news events this week, let’s just keep moving the ball forward until Wall Street returns from summer vacation next week.

In the spirit of not trying to do too much, today we add a solid-if-unspectacular retailer that pays a dividend and has beaten the market over every measurable period the last 15 years, including in the last year. It’s a recent addition from Cabot Dividend Investor Chief Analyst Tom Hutchinson, and here are Tom’s latest thoughts on it.

Tractor Supply Company (TSCO)

Tractor Supply is the largest operator of farm and ranch stores in the United States. Stores target recreational farmers and ranchers in primarily rural areas. The 85-year-old company operates 2,181 Tractor Supply stores in 49 states and 192 Petsense stores in 23 states. Tractor Supply is ranked 291 on the Fortune 500, has 52,000 employees, and over $14 billion in annual revenue.

It’s a significant company and a serious powerhouse in its area. The stores are huge with an average of 15,500 square feet of selling space and a similar amount of outside space. It does have some competition from big boys like PetSmart and Lowe’s (LOW), but it offers a uniqueness that makes it its own destination for rural customers. It also blows away smaller competitors with size and scale.

The store provides an environment and experience that its customers love. It also has the advantage of being partially insulated from e-commerce competition by offering many products that serve an immediate need or are expensive to ship. Here’s a sample of the things people buy at Tractor Supply.

-Clothing
-Power tools
-Equine and pet supplies
-Fencing
-Tractor/trailer parts
-Welding & pump services
-Lawn and garden supplies
-Sprinkler and irrigation parts

In 2022, here’s how overall company revenue was distributed among the product categories: Livestock and Pet (50%); Hardware, Tools, and Truck (19%); and Seasonal Gift and Toy (21%). Tractor Supply has a diversified product offering that enables the store to thrive in just about any economy. That’s a big part of the reason the company has been able to generate 31 consecutive years of sales growth.

In this year’s second quarter, the company still grew net revenue 7.2% and earnings per share (EPS) by 8.5% versus last year’s quarter. Pet and livestock sales grew at twice the rate of its competitors, and it also got double-digit growth from its consumable, usable, and edible (CUE) product subcategory.

Tractor Supply reported earnings that were below expectations and reduced earnings guidance for the year, but the stock price rose 4.2% on the day of the report because the company raised its store growth target from 2,800 (currently 2,181) to 3,000 in the next decade. Investors are wisely looking past the temporarily weak consumer toward strong growth over the longer term.

Tractor anticipates adding 80 new stores in 2024 and an average of 90 stores per year thereafter. The company has a proven ability to profitably integrate new stores. It has grown the store base at a strong clip over the past couple of decades and its return on invested capital (ROIC) has soared from 10% in 2000 to 35% today.

TSCO currently pays an annual dividend of $4.12 per share, which translates to a 1.84% yield at the current price. The payout is well-supported with a 39% payout ratio where retained earnings provide expansion money, and the company is buying back shares. Tractor Supply has grown the payout by a whopping 28% per-year average over the last five years.

The yield on cost is likely to rise significantly if the stock is held long term. But even more importantly, companies that grow their dividend tend to be among the best-performing stocks over time. Look at the annual percentage rate returns of TSCO versus the overall market in years past.

That’s right: TSCO has outperformed the S&P 500 in every measurable period over the last 15 years. A $10,000 investment in the S&P 500 index 5 years ago would be worth $16,530 now (as of August 25), but the same investment in TSCO would be worth $26,540 today. Of course, that’s no guarantee that it will outperform the market in a similar fashion in the future. But companies with consistently growing earnings tend to continue to outperform.

Current Recommendations

Changes Since Last Week:
Aviva plc (AVVIY) Moves from Buy to Hold

No sells this week, and just one downgrade, as Aviva is hitting new 52-week lows for no good reason, prompting us to bump it down to Hold. Most of our stocks, however, had anywhere from solid to very good weeks, with nearly all of them bottoming anywhere from 10 to 14 days ago. For now, it seems that the market has stabilized, which is reflected in the Volatility Index (VIX) tumbling back to 15. We’ll see what September – notoriously the worst month on the investment calendar, as institutional investors return from vacation and sell out of their biggest summer losers – brings. Hopefully, it won’t look anything like the last month, and the mid-August bottom holds.

In the meantime, the market is improving, if only slightly, and most of our stocks are faring even better than that.

Updates

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, ticked down another 1%, continuing its August swoon like many stocks. There was no news. The London-based life insurance and investment management company reported strong first-half earnings two weeks ago. 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 company 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 to new 52-week lows since. With shares having now broken below both their 50- and 200-day moving averages, let’s downgrade to Hold until the stock can get its act together – which may well happen once the market stabilizes, especially in light of the company’s strong first half. MOVE FROM BUY TO HOLD

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has bounced nicely the last couple weeks after bottoming at 96. There’s been no major news. The fact that this Bull Market Stock (Mike’s term) is rebounding even as the bull market is on hiatus in August bodes well for how it might behave once the buyers return. Shares have pretty reliably found support at their 50-day line, so the chart looks good. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was mostly unchanged ahead of earnings this Thursday (August 31). Analysts are looking for 4.7% revenue growth and 7.2% EPS growth. The company has narrowly beaten earnings estimates each of the last four quarters. Having bottomed at 828 about 10 days ago, we’ll keep it at Buy, but it’s probably wise to wait on making any new buys until after Thursday’s earnings report. BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, finally bottomed at 55 and has bounced nicely in the last few sessions after the Chinese EV maker delivered yet another stellar earnings report. This morning, the company reported that first-half profits tripled (+204.7%) on 72.7% revenue growth, and the company set new sales records in July as momentum for its cars (led by its Dynasty and Ocean series) continues to build. With cash flowing in, the company used some of it to buy U.S.-based electronics manufacturing firm Jabil Inc.’s Chinese mobile electronics manufacturing business for 15.8 billion yuan ($2.2 billion) in an effort to expand its customer base and product portfolio as the company seeks to reach a more global audience. Furthermore, gross profit margins improved to 18.7% in the second quarter, up from 17.9% in the first quarter. A rebound seemed inevitable for BYD given its incredible growth; its fall from grace (shares were as high as 71 entering August!) had everything to do with Chinese economic doldrums and almost nothing to do with the company itself. It was my highest-conviction long-term Buy in the portfolio entering August, and it’s even more so now that shares are roughly 17% cheaper, while the company is growing faster than ever. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, is about even in the last week and has been hanging out at 45 for the past 10 days. The media giant remains our portfolio’s most reliable stock and is not far off its 52-week highs despite the sharp market pullback this month. 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 two weeks. In his latest update, Mike wrote, “The prospects for DoubleVerify’s business are basically the same as they were a couple of months ago; analysts still see the top line growing in the low/mid-20% range while EBITDA ramps at around the same pace. That said, there’s no question the stock is broken, but following an offering of closely-held shares, we thought it was likely DV could hold support in the low 30s and bounce. And it did just that, with a modest bounce before today’s reversal. All told, we could easily toss the stock out on the way up and look for greener pastures; for now, though, we’ll sit with our small position.” Having downgraded to Hold a few weeks ago after its big pullback, we’ll hang on too, as long as the stock holds above 31 support. HOLD

DraftKings (DNKG), originally recommended by Mike Cintolo in Cabot Growth Investor, has bounced nicely the last two weeks after bottoming at 26. In his latest update, Mike wrote, “DKNG was hit very hard after the Penn National/ESPN tie-up a couple of weeks ago, dipping all the way back into its May/June range—though it’s started to bounce and approached its 50-day line yesterday. As we wrote initially, we doubt the ESPN action will dramatically shift market share in the online sports betting sector where DraftKings is a huge player, but the fear is that ESPN will essentially bring back the bad old days of huge incentives and marketing spend—hurting profitability for everyone involved. (Indeed, PENN hit new multi-year closing lows on Tuesday.) That said, we’ll see how it goes—DraftKings’ business is on fire, not just because they’re garnering new users but because current users continue to boost their usage in a big way, and we doubt those players will be switching platforms. If big investors think the ESPN move will have more bark than bite, we’d expect DKNG to continue recouping ground; if the stock sinks from here, though, it’s likely going to take a while to turn around, with big investors waiting for clearer data points on the effects of ESPN throwing its weight around. Right here, we’re holding our half-sized stake.” We got in much later than Mike, and our losses have been microscopic, so we’ll keep it at Buy. I like buying stocks whose “business is on fire” right after shares have been beaten down due to mostly outside factors. 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! Up more than 65% since we added the stock to the portfolio in late March, LLY has been our single best performer this year. In his latest update, Tom wrote, “I thought this big pharma juggernaut would pull back after the huge 59% spike from early March until the end of June. But it hung tough near the high through July and has soared another 21% so far in August. LLY is up over 50% YTD and has returned 72% over the past year … It has two potential mega-blockbuster drugs up for FDA approval this year as well as stellar earnings growth for the next several years.” BUY

GitLab (GTLB), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up a point this week, to 45 from 44, and appears to have bottomed at 43 on August 17. The 200-day moving average line has acted as support, which is encouraging. Earnings are due out September 5, so there’s a potentially positive catalyst on the immediate horizon. 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

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, was almost exactly even in the past week and has basically been in a range between 316 and 330 all month. It didn’t get much of a boost from Nvidia’s blowout earnings, which were viewed as a positive omen for all AI-related companies, and Microsoft is definitely one of them with its ChatGPT platform. But Nvidia’s big quarter did confirm that the artificial intelligence boom is still very much in an upcycle, which bodes well for Microsoft. Trading at the high end of its August range, this looks like a perfect entry point into a stock that’s as close to “can’t-miss” as it gets. BUY

Neo Performance Materials Inc. (NOPMF), originally recommended by Carl Delfeld in Cabot Explorer, is flat in the last week and has been chopping around in the mid-6s since gapping up from the low 6s in the first half of the month after the company reported strong earnings. Revenue was slightly higher and adjusted net income was $2.5 million, while the cash position is up to $126 million. Neo manufactures advanced tech and industrial metals and materials such as magnetic powders and magnets, specialty chemicals, metals, and alloys. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, tacked another 1% since we last wrote as momentum from its successful Wegovy trial and stellar recent earnings continue to be meaningful catalysts. Also, as Carl wrote last Thursday, “Reuters published an article stating that Novo Nordisk has secured Thermo Fisher Scientific (TMO) as its second contract manufacturer for its highly popular Wegovy, a weight-loss drug that remains very much in demand. Novo Nordisk recently raised its full-year 2023 outlook to call for sales growth of 27% to 33%.” With a 40% gain on the stock, we’ll keep it at Buy, though it wouldn’t hurt to book profits on a few shares if you got in shortly after our late-December recommendation. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, is clawing its way back after a rough month, up 5% since bottoming at 541 on August 18. 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. It appears that unearned selling is in the process of being remedied, and NOW is setting up for a nice run should the market get in gear in September. BUY

SI-Bone (SIBN), originally recommended by Tyler Laundon in Cabot Early Opportunities, has been methodically inching its way higher since getting knocked back from 25 to 20 on (good) earnings in the first half of the month. Revenue improved 30% year over year while the company raised full-year top-line guidance by $3.5 million, so this was another example of a bad reaction to perfectly fine earnings results. While not roaring back the way ServiceNow is, the worst for SI-Bone appears to be in the rear-view mirror. The company is a small-cap MedTech that 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, finally found a bottom at 55 after three weeks of a post-earnings retreat and has strung together a couple nice trading days on no news. There was nothing wrong with the earnings report, mind you (sound familiar?): 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. So, we’ll keep TEX shares at Buy as long as they hold above new support at 55. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is up 4% since we last wrote and 10% since bottoming at 215 10 days ago. There’s been no real news – a rarity for Tesla – so its rebound is encouraging, especially in the face of yet another round of outstanding earnings results from BYD (see above), its fiercest competitor in China. A bullish note from Baird analyst Ben Kallo helped spark the 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. Kallo maintained a 300 price target on TSLA, 26% higher than the current price. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, keeps holding in the 43-45 range it’s been in for most of August. In his latest update, Mike wrote, “UBER pulled into its 50-day line of late as the market weakened, but unlike most stocks (65% of names in the S&P 1500—big, mid and small-cap—are currently below their 50-day lines), this one has held up and begun to rally. There’s been nothing much new since the Q2 report, which was excellent and continues to bolster the case for continued huge EBITDA and free cash flow growth (some see $4 billion of free cash flow next year) in the quarters to come. All in all, we still think UBER acts like a ‘new’ liquid leader of sorts, with a dominant position in two areas that have a long runway of growth, not to mention the firm’s newer ventures (like taking orders for certain places via its apps and then handing off the order), so we’re optimistic shares can move nicely higher if and when the market kicks into gear. We’ll stay on Buy, but as with most everything in this environment, we advise keeping it small.” Sounds like good advice to me! BUY

Zillow Group (ZG), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up about 4% in its first week in our portfolio. It’s possible we caught this former Covid-era star at just the right time, i.e., on the heels of a sharp market-driven decline from 56 to 49. In case you missed it last week, here’s Tyler’s premise for adding this housing-related stock now: “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.”

Adding credence to the notion of a coming housing market rebound, Jerome Powell said as much in his Jackson Hole speech last Friday, saying the housing sector is “showing signs of picking back up.” With ZG trading at roughly a quarter of its early-2021 peak, this is a great value play in an industry that’s destined for much better times in the year ahead. 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 September 5, 2023.