Cabot Stock of the Week Issue: August 5, 2024

What once looked like a normal, albeit highly volatile, market pullback has deteriorated into a full-blown sell-off in the last two trading days. Today’s early action was particularly disturbing, with S&P 500 Futures down more than 4% at one point and the VIX briefly spiking to its highest point since Covid hit in March 2020. Yikes!

Things have settled during the trading day, though the S&P is still down 2.5% on the day and nearly 8% since mid-July. The Nasdaq had already entered true correction territory entering the day and is now down 12.5% from its July 10 highs. So, this is a market correction. When will the selling stop? And why is it happening? The latter answer seems complicated, as some combination of a Japanese market meltdown creating a global domino effect on other markets, Middle East unrest escalating and threatening to spread, U.S. presidential election uncertainty increasing with a new candidate creating a more competitive race, and a very underwhelming jobs report from last Friday have conspired to knock stocks from their previously lofty perch.

So when will it stop? No one knows of course. But I’ll refer to my previous statement that bull markets almost never up and fizzle so quickly, and at just 21 months old, this one would tie for the shortest bull market in history if we actually reach the dreaded 20% decline mark. The average bull market lasts 63 months. With the Fed a stone-cold lock to finally start cutting interest rates next month – 85% of economists now think they’ll cut rates by 50 basis points! – the presidential election cycle mercifully coming to an end in just three months, and most economic data points still holding up quite well besides last week’s jobs report (corporate earnings are on track for their fastest-growing quarter since Q4 of 2021), I’m betting the selling won’t last much longer.

With selling occurring in markets around the world right now, let’s bet on long-term growth. And no major world economy is growing faster than India. So today, we add exposure to the Indian market by doing something we rarely do – investing in an ETF. It’s a new recommendation from Carl Delfeld in his Cabot Explorer portfolio.

Here it is, with Carl’s latest thoughts.

iShares MSCI India Small-Cap ETF (SMIN)

India presents us with some difficulties since it is persistently an expensive market with a very limited number of companies trading on U.S. exchanges.

The most well-known names are particularly expensive from a valuation point of view. Nevertheless, for several reasons, India is too strong to be ignored, and so today, I recommend a way to leapfrog some of these concerns.

India’s economy is firing on all cylinders. In the first quarter, it grew at an impressive 7.8% year over year – the fastest among major economies. The Asian Development Bank projects this growth will continue into 2025.

This top-line economic growth is leading to some impressive corporate profits.

The country’s manufacturing sector, fueled by overseas efforts to diversify away from China, has led to an investment boom. Southeast Asia, India, and Japan have been the winners as China’s star has lost some luster with investors.

Then there is India’s potential growth advantage due to a youthful population with a median age of 28.6 compared to China’s 39.5. This demographic dividend holds the potential of long-lasting consumer spending and a dynamic youthful workforce to power India’s companies ahead.

These are just some of the reasons India is increasingly the choice for overseas investors, leading to the country’s weighting in market indexes growing along with its geo-political heft.

The recent MSCI benchmark emerging markets index rebalancing saw India’s weighting increase to around 18%, up from just 8% in 2020, while China’s weighting has declined to 27% from 40%.

Whether India’s momentum will continue is an open question as it faces significant challenges in infrastructure, education, and food security. But investors have made a clear turn to India.

The best move right now would be a leapfrog approach with an exchange-traded fund (ETF) focused on India’s smaller companies.

I recommend the iShares MSCI India Small-Cap ETF (SMIN).

This is a $960 million fund that holds a basket of about 500 small-cap India stocks – many of which Western investors have never heard of since they are solely listed on domestic exchanges.

The fund isn’t overly costly at 0.79% in annual expenses. 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-reward way to play the fastest-growing economic power in the world today. BUY

Current Recommendations

Changes Since Last Week:
Cava Group (CAVA) Moves from Buy to Hold
Neo Performance Materials (NOPMF) Moves from Buy to Hold
Qualcomm (QCOM) Moves from Buy to Sell
Uber Technologies (UBER) Moves from Hold to Sell
United Airlines (UAL) Moves from Hold to Sell

In a major market sell-off like this one, there are inevitably some casualties. And today, we have three, as Qualcomm, Uber and United Airlines have all earned their walking papers thanks to significant downturns. That’s OK – our portfolio needed some pruning. Thankfully, two of the three stocks produced gains even after their recent underperformance.

Two more stocks – CAVA and NOPMF – earned downgrades but are holding up well enough to still warrant inclusion. The selling in the rest of our portfolio names has been fairly orderly, and a couple (MCK, UNH) even gained ground in the past week. Many others in our portfolio report earnings this week.

Here’s what’s going on with all our stocks in the midst of the sharpest market downturn of 2024.

Updates

AST SpaceMobile (ASTS), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, gave back some of its 46% gain from the prior week, but not before rocketing to new record highs above 20 to close out July. It has since gotten caught up in Friday and today’s market sell-off and has dipped back below 18. But considering the stock traded at just 11 per share entering July and at less than 13 a share two weeks ago, the pullback has been rather tame (so far), considering the environment. The company’s immense promise may be providing a high floor at the moment, especially after this morning’s announcement that the Federal Communications Commission (FCC) has granted AST SpaceMobile an initial license for space-based operations in the U.S., paving the way for space-based cellular broadband service for smartphones in the U.S. There’s plenty of upside for this unique company, but I’m sure we’ll have to ride out some volatility in the coming days/weeks – and we’ll see how the company’s earnings, due to be reported on August 14, impact its short-term trajectory. Fortunately, we already have a very large gain to cushion us against any further sharp drops. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, is an oasis in a desert right now – a steadying force in our portfolio, with little fluctuation week to week but, over time, inching its way higher. Sure, it has dipped along with everything else after touching new two-year highs above 13 last week, but it’s only down to 12.5, which is higher than it was for most of July. Hitting a new high in the midst of a turbulent market is exactly why you own a boring stock like Aviva. The U.K.-based life insurance and investment management firm will report earnings on August 14. The 6.7% dividend yield further adds to its appeal. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is down 6% in early Monday trading, which is in step with its “Bull Market Stock” reputation. In bull markets, Blackstone – one of the top alternative investment firms in the world – rises even higher. But when the market pulls back, BX tends to pull back even more sharply. That’s what’s happening today (and last Friday), but the stock is just a week removed from reaching new 52-week highs above 143 and is still trading above its July lows. If there’s more selling in the market in the days ahead, then BX will likely fall even further. But as long as the bull market remains intact, BX will likely remain in our portfolio. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was down nearly 5% in early Monday trading and has sunk to a two-month low at 137. That’s still well above its 200-day moving average (126) and we still have a sizable gain on the stock, so we’ll hang in there with this AI-powered dividend payer. But let’s keep a close eye on it. The good news is the company itself hasn’t done anything wrong; it’s just getting caught up in all the selling with many other AI-related stocks. HOLD

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, was down nearly 6% in early trading today, dipping below 77 support (to 76), though we’ll see how it closes. There was no news. Here’s what Mike had to say about the stock in his latest update (from last Thursday – before the Friday/Monday market massacre): “After a 23% correction, CAVA has held above some support in the low 70s, and as long as it can continue to do that, we’re OK practicing patience with our remaining shares (we already booked partial profits earlier)—but if not, we’ll look to lighten up or sell outright and move on. Right here, we’re giving the stock a chance and we’re not forgetting about the unique long-term cookie-cutter angle here.” Let’s hang in there as well. But with the stock down substantially from its highs around 95, let’s downgrade to Hold until it can stabilize. MOVE FROM BUY TO HOLD

Dick’s Sporting Goods (DKS), originally recommended by yours truly in my Cabot Value Investor advisory, had a rough week on no news, dipping to 195 this morning after reaching as high as 216 last week. Like so many other stocks, it did nothing wrong – there was no news. So, let’s view this as an opportunity to buy lower if you missed the boat before. I still love Dick’s growth – from 2016 to 2023, the sporting goods chain’s revenues have improved 64%, from just under $8 billion to just under $13 billion. This year, the top line is on track to top $13 billion for the first time. It should top $13.5 billion next year.

Dick’s, in fact, has grown sales in each of the last seven years – including in 2020 and 2021, when most other retailers saw sales nosedive due to Covid restrictions. But Dick’s all-weather ability to keep growing no matter what’s happening in the world or the economy speaks to its versatility. Since Covid ended, however, Dick’s sales have entered another stratosphere. As youth sports returned in 2021, Dick’s revenues jumped from $9.58 billion to $12.29 billion. They’ve been rising steadily each year since and are expected to do so again this year.

But Dick’s isn’t purely a growth stock—it’s also undervalued. DKS shares currently trade at just under 15x forward earnings estimates and at 1.28x sales. In Cabot Value Investor, I set a price target of 250 – 27% higher than its current share price. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, reports earnings this Thursday, August 8. Analysts are looking for 19.7% revenue growth and 28% EPS growth. The company has beaten bottom-line estimates in each of the last four quarters. The stock is down more than 18% from its highs, partly due to the selling of the last two trading days, but also because of new competition in the weight-loss drug space from Roche Holdings (RHHBY), which reported impressive clinical results for its new weight-loss drug candidate. But as Tom noted, competition in such a revolutionary industry was inevitable. Brands matter, and Eli Lilly is the biggest brand in big pharma (it’s one of the Olympics’ top sponsors), and Mounjaro and Zepbound are weight-loss drug leaders. I think the selling is overdone and that LLY won’t stay down long. Perhaps Thursday’s earnings report can spark a turnaround. BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, is the rare company that hasn’t lost ground since our last issue, thanks to another stellar earnings report. 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%. After last Thursday’s report, GDDY stock soared from 141 to 151 – a new all-time high! It has since sagged back to the 145-146 range, which is where it was a week ago and is just below the previous highs. In this market, that qualifies as a victory. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, has fallen below 2024 support in the 10.8-10.9 range, though not on a closing basis yet. The company will report second-quarter earnings later today, so perhaps those could precipitate a quick bounce-back. Analysts anticipate 9.9% revenue growth and earnings per share to remain flat at 5 cents. Our loss on the cannabis stock is modest, having added it to the portfolio at 11 a share at the beginning of the year. And potential catalysts for the cannabis sector abound. So we can afford to hang in there at least until after the earnings report. If it disappoints and sends the stock tumbling further, we will quickly abandon ship in a Special Alert. But let’s not get ahead of ourselves. Let’s see what happens with earnings first. HOLD

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was down “only” 2% this week, but has fallen from 461 to 433 in the two weeks since the maker of the da Vinci robot surgical system got a huge post-earnings pop. It’s still well above its pre-earnings level of 416. The company beat earnings estimates as worldwide procedures with the da Vinci increased 17%. The company is benefitting from all the “catch-up” surgeries people are having after a couple years of not being able to do elective surgeries due to the Covid pandemic. On top of that, the company is starting to roll out its new and improved da Vinci 5 system quicker than expected, and that’s already accelerating sales; the company sold 70 of them in the second quarter, up from just eight in Q1. It seems the promise of the da Vinci 5 is acting as something of a buffer against any major selling (at least so far). Because of that promise, this modest dip looks buyable. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, tumbled to 47 from its normal perch in the 51 range. The business development company reports earnings this Thursday, August 8, so perhaps that will turn the tide. Expectations are modest, but the company has beaten earnings estimates in three of the last four quarters. We’ll keep it at Buy for now, but I’d recommend holding off on any new buys until after the earnings report. BUY

McKesson Corporation (MCK), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is … up!! Yes, this supply chain pharmaceutical dividend payer is doing its job of holding its line against the tidal wave of selling and has actually inched forward from 605 to 610 since our last issue. Wednesday’s (August 7) earnings report may be helping matters, although analysts are expecting no growth on either the top or bottom lines. We’ll see. For the year, McKesson anticipates 17% revenue growth and 15.6% EPS growth, so as long as that guidance doesn’t change, MCK shares should continue to hold up nicely. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, is down about 6.5% after reporting earnings last Tuesday. Here’s what Tyler had to say about the report: “High level, revenue was 0.5% above expectations and EPS beat by a penny, but Azure growth was mildly below consensus (albeit still at the low end of management’s guidance). CapEx (which some see peaking soon) came in at $19 billion (+5 billion over last quarter) and was the largest sequential increase ever.

“A subdued Q1 fiscal 2025 guide confirmed suspicions that this is a bit of a soft patch, at least relative to elevated expectations with all the euphoria around AI.

“That said, soft patches are to be expected every now and then and Microsoft is still the clear leader in many of its markets, as well as AI. Management says Azure growth is expected to reaccelerate to the 28% to 29% range through fiscal 2025, with some commentary suggesting capacity limitations could ease.

“That points toward CapEx spending. On that front, nearly all of ramping CapEx spend is going toward cloud and AI-related investments, half of which is targeted at building and leasing data centers to support monetization over a decade and a half.

“In other words, the train has not left the station yet when it comes to making money off AI.

“There are a lot of moving parts to a company this large, but stepping back, it’s difficult to find serious issues that would make me want to avoid the stock. There will be some swings in share price to be sure, but I think those (like now) represent buying opportunities.”

I couldn’t agree more. The steep pullback in MSFT shares in the last month (down 15%) looks like a prime buying opportunity in one of the market’s most reliable growth stocks. BUY

Neo Performance Materials (NOPMF), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is down 18% since hitting 2024 highs at 6.3 in mid-July. There’s been no news for this rare earths and critical metals miner. With earnings due out this Friday, August 9, let’s hang in there. But I’m going to downgrade to Hold given the recent weakness. MOVE FROM BUY TO HOLD

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, is down about 4% in the last week and hasn’t gotten the bump from earnings it received after the Q1 report. 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. Given those strong numbers – and the company’s ever-expanding dominance of the streaming video space – I categorize this stock decline like I do Microsoft’s: a buying opportunity into one of the market’s great growth stocks. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, is mostly flat since our last issue, which may bode well for this Wednesday’s (August 7) earnings report. Analysts are looking for 26% revenue growth and 11% EPS growth, and the company has topped EPS estimates in each of the last two quarters. The stock is down about 14% since hitting record highs above 147 in late June, so perhaps the sellers are running out of ammo with a perfectly good growth stock. We’ll have a better idea after Wednesday’s report. BUY

Ollie’s Bargain Outlet (OLLI), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, is down about 4.5% in the last week and has dipped below 96 support. There was no news, and the selling appears to be almost entirely due to the recent market sell-off. No need to panic. The bargain retailer isn’t that far off its highs around 100, and shares are still way up from 65 in early April. This looks like a normal pullback after a big run, and I expect it to bounce back. BUY

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, is down in the last week but is clinging to its recent 38-to-41 range. In his latest update, Mike wrote, “If growth stocks can hold together and get moving, we still think On Holding (ONON) has the makings of a winner—more funds are signing on (476 at the end of Q2, up from 449 and 372 the prior two quarter-ends), including some good ones (Contrafund owns about 2.5% of the company; T. Rowe New Horizons has built a small position), and of course, the underlying story (emerging athletic brand, more categories covered, moving into apparel and accessories) is as good as ever. The stock has been wild, but overall has been etching higher lows (36, mid-37s, mid-38s) the past three weeks and has seen some big-volume buying, including on Wednesday. Of course, the upcoming quarterly report—due August 13—will be the biggest factor, but we think the past eight weeks have been a normal base-building effort.” BUY

Qualcomm, Inc. (QCOM), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is down 30% in the last six weeks, and it’s time to sell before this turns into a loser. It’s already dipped below the 200-day line after last week’s solid earnings report (which beat on both the top and bottom lines) wasn’t able to stop the bleeding. In a crowded portfolio, it’s not worth holding and hoping anymore. MOVE FROM BUY TO SELL

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is down 10% in the last week and is trading at a new three-month low. There was no news, although it’s been a rough couple trading days for speculative overseas stocks. The company reports earnings on August 13. I still like it as a play on Southeast Asian growth, and this multi-pronged Singapore-based conglomerate offers multiple growth avenues. And the stock is trading at just a fraction of its 2021 highs (357). Plenty of upside here, but the stock needs to start proving itself again soon. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, could not have timed its latest earnings miss any worse, coming right in the midst of a fierce market pullback. After topping out at 263 prior to earnings, shares have tumbled all the way back to 200. That’s higher than the 170s and 180s the stock had set up shop in for most of the year – marginal improvements in second-quarter deliveries offered a glimmer of hope – but the exuberance was short-lived. With shares hovering around their 200-day line, we’ll keep our rating at Buy for now. But I’d keep new buys very small until the stock can find new support. BUY

Uber Technologies (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, has totally fallen apart in the last three weeks, plummeting from 74 to 58. The stock peaked way back in mid-February, at 81. It now has to crane its neck just to see its 200-day moving average (65). Earnings are due out tomorrow, August 6, and it’s tempting to hang in there and see what happens. But UBER was on very thin ice entering the week, and it’s totally broken down since. Besides, coming off a first quarter in which earnings fell well short of estimates, it’s possible another miss could send shares tumbling even further. Let’s get out now, while we still have a very respectable return. MOVE FROM HOLD TO SELL

United Airlines (UAL), originally recommended by yours truly in the Growth/Income Portfolio of Cabot Value Investor, has imploded in the last week, falling from 47 to a new six-month low below 39. Shares are so cheap their valuation needs a microscope to see them. But unlike Cabot Value Investor, Stock of the Week isn’t a value portfolio. Performance matters. And this stock just hasn’t lived up to my expectations since I added it in late May. Let’s sell, before our losses mushroom any further. MOVE FROM HOLD TO SELL

UnitedHealth Group Inc (UNH), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is up nearly 2% in the last week!! How did that happen? Tom explains: “The previously beleaguered healthcare insurance giant got a new lease on life. After wallowing in oblivion since seemingly forever, UNH soared about 20% since early July and made a new 52-week high. Earnings drove the stock. UnitedHealth beat earnings forecasts as it added more patients and pharmaceutical customers despite a continuing negative effect on profits from the February cyber-attack. UnitedHealth also reaffirmed previous guidance for 2024. The market is apparently happy and reassured.” BUY

United States Steel Corporation (X), originally recommended in the Cabot Turnaround Letter, is down since the company reported better-than-expected earnings last Thursday, but the selling has been rather modest. Revenue declined 18% but beat estimates, while earnings of 84 cents a share just barely beat the consensus. The company also just declared a dividend of five cents a share (a 0.5% yield). Really, earnings are almost beside the point for this company and its share price, as Wall Street awaits approval of a $14.9 billion takeover bid from Japanese steelmaking giant Nippon Steel. There’s a lot of politically motivated red tape to get through if the deal is to cross the finish line. But if approved, shares will almost certainly explode higher. As is, X shares are up about 13% since we added the stock to the portfolio in late June. That’s a good start, with way more potential upside still to come. BUY

Viking Holdings (VIK), originally recommended by Mike Cintolo in his “Best Stocks to Buy in August” report, was down from 35 to 32 in its first week in the portfolio. Bad timing, obviously. But one bad week due to extreme market selling is not a reflection of this stock’s potential. It’s a play on the post-pandemic travel boom, and one that owns a specific niche (luxury river cruises; 80 of its 90 vessels are river boats). There’s far less competition than ocean cruises, though Viking is also slowly dipping its toe into ocean cruises (nine ships). Business is good (revenues up 14% in Q1, occupancy was over 92% for both river and cruise voyages) and the future looks bright, with 91% of 2024 and 39% of 2025 capacity already booked as of mid-May. And the stock is up 32% since its late-April IPO. It will have way better weeks. 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 12, 2024.

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