Cabot Stock of the Week Issue: December 12, 2022

This is yet another pivotal week for the stock market, with the November inflation report due out tomorrow (Tuesday) and the Fed set to hike interest rates again on Wednesday. The CPI (Consumer Price Index) is expected to dip to 7.3%, down from 7.7% in October; the federal funds rate is expected to be raised another 50 basis points. If either of those numbers comes in higher than expected, then you can expect stocks to have another bad week, and perhaps a rough few weeks to close out the year. If either number is lighter than expected – particularly the inflation number, since that’s far more likely – then expect stocks to erase much, if not all, of last week’s losses. That’s how Fed- and inflation-dependent stocks have been all year in 2022.

Someday, possibly in 2023, that will change, and Wall Street won’t have to hold its collective breath every time Jerome Powell speaks, or fret over decimal points on the annual consumer price increases. But we’re not there yet and won’t be soon. So, weeks like this one will continue to determine the fate of stocks, at least in the short term. In the meantime, we’ll keep doing as we’ve done: adding a blend of growth, dividend, and value stocks so as not to be too over-leveraged in any investment type, since they’ve been out of sync all year (see 2022 losses in the Nasdaq vs. the Dow); pruning our weakest stocks before they can become big, portfolio-sapping losers; and spreading things around to a variety of different sectors.

This week, we add a company from a sector we don’t currently have: biotech. It’s a recent recommendation from our trusty growth expert Mike Cintolo, and here are Mike’s latest thoughts on it.

BioMarin Pharmaceutical Inc. (BMRN)

We continue to think biotech stocks are close to pole position when it comes to being leaders of the next growth stock bull run, both because the group has mostly sat out the past few years (not much change net-net since the group’s huge peak in 2015) and because many bottomed months ago, with a few having already broken out on the upside.

BioMarin looks like one of the leading plays in the sector both near- and longer-term thanks to a broad business (it has many proven treatments already on the market) that’s led to a consistently positive bottom line in recent years—and, more important, because of a couple of newer treatments that should goose growth going forward.

BioMarin has seven drugs currently on the market, led by Vimizim, the first and only enzyme replacement therapy for what’s known as Morquio A syndrome, a rare genetic disorder in kids that prevents them from breaking down sugar chains in the body, leading to a host of issues. The drug has $512 million of revenue through the first nine months of 2022, up 10% from a year ago, with similar growth likely in Q4. There’s also Naglazyme (treats a condition that causes many tissues and organs to enlarge or inflame and eventually atrophy), with revenues of $343 million so far this year, up 15%); Palynziq (used to lower levels of an amino acid that can cause brain damage and seizures), with revenues of $183 million this year (up 5%); and a couple other smaller and/or drugs that are past their peak.

That said, the real excitement here surrounds two treatments, one that hit the market late last year and one that should do so soon.

The first is Voxzogo, which was approved by the FDA a year ago, becoming the first treatment for a certain form of short-limbed dwarfism. It’s a daily injection for those generally between the ages of 5 and 18 or so (when growth plates close) that helps patients grow faster than they would naturally. One analyst thinks the drug could have peak sales north of $1 billion, and it’s off to a great start—revenues came in at $48 million in the third quarter, with 713 children on the medication at the end of September in 29 active markets, including in Japan, which just went live in August. Growth here should remain rapid for a long time to come.

And then there’s Roctavian, a gene therapy to treat hemophilia A (a hereditary bleeding disorder caused by the lack of a certain clotting factor)—interestingly, the FDA gave it the thumbs down two years ago (which caused the stock to plummet), but now it looks like it’s onboard, with a recent decision not to hold an advisory panel meeting, likely meaning approval is coming by the end of March. And this will come on the heels of Europe giving the go-ahead in the third quarter, with sales starting in that continent in Q4 and ramping into 2023—and at $2 million-plus per patient, the upside potential here is big.

All told, Wall Street sees revenue growth accelerating from around 13% this year to 22% next year, and after a cost-heavy year, earnings are expected to triple to north of $2 per share, easily hitting new company records and growing nicely in the years after.

As for the stock, BMRN has been mostly range-bound for the past couple of years, though it tried to break out in August—only to have the market yank it back down. But that retreat was normal, with support near 80 holding, and the good FDA tidings for Roctavian around Thanksgiving finally brought the decisive green light: BMRN gapped up on the news, tagged multi-year highs and lifted over the century market on a series of big-volume days.

You can buy it here or on dips to new support around 102.

Current Recommendations

Changes Since Last Week’s Issue:

Corteva (CTVA) Moves from Buy to Hold
Rivian (RIVN) Moves from Buy to Sell

We have one sell this week and one downgrade, keeping our portfolio at 18 stocks. For all its promise of future growth, Rivian (RIVN) simply hasn’t gotten the job done since we added it to the portfolio about six weeks ago. So, it’s out. Corteva’s (CTVA) losses have been more modest, but we’ll downgrade that one to Hold after a sharp drop-off.

Most of our other stocks are acting well, including a couple that managed to eke out productive weeks despite a down week for the market. Here’s the latest on all of them.

Updates

Arcos Dorados (ARCO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, keeps holding steady in the 7.2 to 7.6 range. No news. And shares of the world’s largest McDonald’s franchisee still have about 18% upside to Bruce’s 8.50 price target. BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, was more or less steady in the past week, though the stock is down so far this month after a big run in November. In his latest update, Tom wrote, “I’m disappointed. This infrastructure partnership had been trending sharply higher since the second week of October but has pulled back so far this month. It’s likely because of turbulence in China and/or a stronger dollar. But it should be a temporary blip as the company’s crucial assets will continue to deliver steady earnings through a recession, it has inflation adjustments built into its contracts, the dividend is solid, and the stock is cheap now. (This security generates a K-1 form at tax time).” HOLD

Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, dipped from 36 to 33 since we last wrote, and our once-large profits have dwindled. Aside from a drastic (and overdone) earnings collapse in early November that briefly took the stock down to a closing low below 31, this is the lowest LEU has been since early August. Do we abandon ship? Not yet. According to Carl, in his latest update, “three hedge funds were long Centrus in the third quarter, while six hedge funds were long the stock in the previous quarter. Their total stake values were $14.9 million and $14.7 million, respectively. This is still a buy for aggressive investors.”

Let’s be a bit less aggressive and keep it at Hold, for now. HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, was down a tad in its first week in the portfolio, dipping from 49 to 48. Not to worry. Nothing beyond last week’s broad market decline hurt the stock. In his latest update, Bruce wrote, “Cisco Systems (CSCO) is facing revenue pressure as customers migrate to the cloud and thus need less of Cisco’s equipment and one-stop-shop services. Cisco’s prospects are starting to improve under a relatively new CEO, who is shifting Cisco toward a software and subscription model and is rolling out new products, helped by its strong reputation and entrenched position within its customers’ infrastructure. The company is highly profitable, generates vast cash flow (which it returns to shareholders through dividends and buybacks) and has a very strong balance sheet.

“On November 16, Cisco reported a reasonably solid quarter. Results were ahead of the consensus estimates, and guidance for the next quarter and the full fiscal year were incrementally above current estimates. Cisco continues to generate prodigious amounts of cash flow, at $4 billion in the first quarter, up 16% from a year ago and reaching nearly 28% of revenues. Just over half of this $4 billion was spent on dividends and share buybacks – uses we find to be savvy given the shares’ depressed valuation. Cash net of debt increased to $10.7 billion. Valuation remains unchallenging as investors underestimate Cisco’s resilience. Please see our weekly note following the report for more detailed commentary.

“CSCO shares … have 36% upside to our 66 price target. The valuation is attractive at 9.5x EV/EBITDA and 13.7x earnings. The 3.1% dividend yield adds to the appeal of this stock.” BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, was up slightly this past week, though the stock remains in the same 34-36 range it’s been in for the last month. In his latest update, Bruce wrote, “Comcast said that its Peacock streaming service has over 18 million paid subscribers, up from 15 million at the end of October. Separately, Comcast received a rating upgrade from longtime bear Wells Fargo Securities, which raised its rating to ‘equal weight’ from ‘underweight.’ The favorable shift was due to the analyst apparently overestimating the negative effects of cord-cutting and other trends on Comcast.

“Comcast shares … have about 15% upside to our 42 price target. The shares offer an attractive 3.1% dividend yield.” BUY

Corteva (CTVA), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has fallen sharply since the calendar flipped to December, dipping from 67 to 62. In his latest update, Carl wrote, “Corteva (CTVA) shares were off three points as the company agreed to buy biologicals firm Stoller Group for $1.2 billion to accelerate its expansion into the growing market for nature-based, crop protection products. Stoller Group has operations and sales in more than 60 countries and $400 million in forecast revenues from the deal.

Corteva (CTVA) uses emerging technology to help farmers improve crop yields and boost output. While the market is down sharply over the past year, Corteva is up more than (30%). Although the down market does lead to quality companies with growing top-line revenue and net profits trading at bargain prices, a strong case can be made for stocks like Corteva that are recession-resistant and outperforming the market on a relative basis. Recently, Corteva reported a 12% increase in net sales and beat earnings expectations by about 50%.”

There’s a lot to like here. Given the recent weakness, however, let’s downgrade it to Hold. MOVE FROM BUY TO HOLD

Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, gave back some of its recent gains this past week, falling from 334 to 321. Still, the stock is up 35% in the last two months and 62% since it was added to the Stock of the Week portfolio in late June. It remains our best-performing stock of 2022. In his latest update, Mike wrote, “Enphase Energy (ENPH) ran to new highs last Friday on solid (not amazing) volume, but shares turtled after, with an ugly decline back into its base as sellers again hit anything near multi-month highs. (Solar stocks in general got hit, too.) That said, ENPH has bounced back decently so far, holding above its 25-day line, so we’re not reading too much into it—plus, of course, there’s little doubt demand is going to outrun supply as projects in the U.S. and Europe plow ahead. We’ll be watching to see if there’s any follow-on selling; if there is, we’ll probably go to Hold—but right here, we’re still OK picking up a few shares if you don’t own any.” We are too. BUY

Green Thumb Industries (GTBIF), originally recommended by Tim Lutts and then Michael Brush in the Sector Xpress Cannabis Advisor, fell flat on its face this past week, plummeting from 16 to 11 and dipping below its moving averages. The reason was Congress’ choice not to pass the SAFE Banking bill, which would give the cannabis industry the banking legislation it needs, last week. As a result, all cannabis stocks suffered, evidenced by the 19% drop-off in the ETFMG Alternative Harvest ETF (MJ). There’s still a chance the SAFE Banking bill passes before the end of the year – it’s possible it will get attached to an omnibus funding package. For now, though, cannabis stocks are taking it on the chin. Is it one really bad week, brought on by a classic market overreaction? Or the beginning of yet another dip for the industry? I’m betting it’s the former. So, for now, we’ll keep GTBIF at Buy. BUY

Kinross Gold (KGC), originally recommended by Clif Droke in his Sector Xpress Gold & Metals Advisor, was flat this past week after rising 8% the week before. No news, though Kinross’ status as a safe-haven gold stock likely helped it stay afloat during last week’s mini-selloff. If you haven’t bought already, this looks like a good time to do so. BUY

NerdWallet (NRDS), originally recommended by Tyler Laundon in Cabot Early Opportunities, has had a rough couple weeks since we added it the portfolio, falling from 12 to just below 10. There’s been no news; likely, NRDS is getting tossed aside like most growth stocks in the last week or so. We’ll keep it at Buy for now, and see how shares of this small-cap financial services company respond to inflation and the Fed this week. BUY

Ormat Technologies Inc. (ORA), originally recommended by Brendan Coffey in his Sector Xpress Greentech Advisor, keeps hovering right around 90, despite some ups and downs. The current tight range between 88 and 91 looks like a decent launching pad should the market get going. We’ll see what happens. Keeping at Buy. BUY

Realty Income (O), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was one of our few stocks that was up meaningfully this past week, rising from 62 to 64, though it’s still down slightly in the past month. In his latest update, Tom wrote, “After an impressive rally from the October low, O has given some of it back over the last couple of weeks. That’s OK. It’s normal. O tends to spike higher and then pull back and consolidate. There isn’t any negative company-specific news behind the recent weakness and O still has the right stuff for this market. It’s recession-resistant and a great source of income. It will still likely continue to trend higher, but perhaps in a choppier fashion than we’ve seen recently.” BUY

Rivian (RIVN), originally recommended by Tyler Laundon in Cabot Early Opportunities, fell through support at 28 and is now down about 20% from where we bought it in late October. With the selling accelerating this morning, let’s step aside and make room in our increasingly crowded portfolio for better opportunities in 2023. MOVE FROM BUY TO SELL

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down about 6% since we last wrote, though it remains above its November lows. The company is still chugging along, but its perception has suffered of late thanks almost entirely to Elon Musk’s recent public missteps. According to a November 7 survey by the U.K.-based research firm YouGov, Tesla now has a negative perception among consumers for the first time since the firm started conducting daily consumer surveys in 2016. Tesla started the year with a net positive consumer rating of +5.9%; it now has a rating of -1.4%. Musk’s takeover of Twitter has had a lot to do with the perception decline, as have some recent accidents that may have been due to faulty driver assistance software.

Sounds like a lot of short-term noise to me. Down more than 50% year to date, TSLA is oversold. Still, I’m going to keep the stock at Hold until it can reverse the downtrend for more than a week or so. HOLD

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was unchanged this past week – remarkable given the stock’s recent run to new all-time highs and the sharp market selloff the last few days. ULTA is still riding the wave of an impressive third quarter, reported on December 1. Some of the highlights: Comparable-store sales improved 14.6%, well ahead of the 8.8% jump analysts anticipated. Net income increased 27.5% year over year, to $274.6 million. And full-year earnings guidance was raised to a range of $22.60 to $22.90, ahead of the $20.70 to $21.20 expected. Last week, we upgraded the stock to Buy, and will keep it right there. BUY

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, was down slightly, but not as much as the market. In his update last week, Mike dug deeper into the recent action in shares of this burgeoning fast-food giant: “Wingstop has followed the same script as many growth stocks this week—it was looking great coming into Monday, then fell sharply but didn’t crack (in fact it held its 50-day line, currently near 145) and has bounced pretty well since. We’re not complacent, and a break under support would have us going to Hold, but for now, the stock is holding its post-earnings gains well (it’s actually etched a decent-looking month-long rest)—we’ll stay on Buy.” We will too. BUY

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, doesn’t move much, which isn’t a bad quality in this topsy-turvy market. Slowly but surely, it’s gained ground since we added it in early October. The fund offers a high dividend yield and some of the highest-quality emerging market stocks in the world with an average price-to-earnings ratio of around 5. This ETF gives broad exposure to large caps, mid-caps and small caps with an emphasis on income and value.

Xponential Fitness (XPOF), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was down about 4% this past week after temporarily inching to new multi-month highs last week. The decline appears market-driven, as there’s been no news with the company since it signed a master franchise agreement in Japan for its Rumble and AKT brands. The deal gives Xponential the option to license a minimum of 100 new fitness studios in Japan over the next eight years. BUY

The next Cabot Stock of the Week issue will be published on December 19, 2022.