Cabot Stock of the Week Issue: December 18, 2023

Programming Note: This is the last Cabot Stock of the Week issue of 2023! I will be out on vacation all next week, celebrating the holidays with my family, and thus it will be our first and only off week of the year. I will be back the following week, and our next issue will be published on January 2, 2024. If something huge happens with one of our stocks between now and then, I will send out an alert. Happy holidays, everyone!

Jerome Powell is playing the role of Santa Claus this holiday season. Didn’t see that one coming.

For the first time since this two-year rate-hiking campaign began, Powell mentioned the possibility of “cuts” at his press conference last Wednesday – perhaps as many as three of them in 2024. Naturally, the market loved it, and stocks are now on the doorstep of new all-time highs – a mid-December development that seemed almost unfathomable just six weeks ago. And having cleared a major “macro” hurdle last week, with inflation continuing to come down and the Fed suddenly pivoting from rate hikes to (potentially) cuts in the coming months, there is seemingly nothing standing in this bull market’s way, other than the perception (and reality in some cases) that stocks have become overextended. Of course, these are often the times when Mr. Market loves to humble you – when you least expect “him” to. But that’s not a very festive thing to say in the thick of the holiday season.

As my predecessor Tim Lutts used to say, it pays to be an optimist. So rather than brace for the market’s short-term comeuppance, let’s ride the wave while the tide is still coming in. With that in mind, we close out 2023 with another growth play (pun intended) that is experiencing a resurgence in a post-Covid world. It’s a new recommendation from Mike Cintolo in Cabot Top Ten Trader.

Here it is, with Mike’s thoughts.

Dave & Buster’s (PLAY)

We’ve seen a lot of turnaround-type retailers do well, mostly in the apparel field, but Dave & Buster’s is more of a restaurant/entertainment play that seems next in line to benefit from that trend. The company operates 159 namesake locations that are basically a mix of an arcade and a casual restaurant that appeals to older families and adults looking for a fun time; plus, thanks to a 2022 acquisition, it also has 58 Main Event locations that have a similar vibe but its customer base skews younger (families with children). It’s always been a differentiated business that’s very profitable (free cash flow is much larger than earnings; store-level EBITDA margins of 35%!), but growth has been stagnant (excluding the acquisition, revenue growth is flat this year), which is one reason there’s been a change at the top—the buyout of Main Event brought a new management team that was highly successful at expanding that operation while keeping costs in check, and it thinks it has many levers to accomplish the same thing with the new, larger company. Indeed, at a June Investor Day, the top brass indicated it expects to grow the store base by 16% over the next couple of years (and sees long-term potential of 550 locations), which, combined with efficiencies and organic growth, should help EBITDA to nearly double from 2022 to 2025—and sees cumulative free cash flow during the next five years of $1.7 billion (90% of the current market cap) even if all current locations don’t grow at all! Not surprisingly, then, management thinks the stock is a bargain and is buying back shares like mad, repurchasing 17.5% of the total in the first nine months of the current fiscal year. Analysts see revenue growth of 7% next year with earnings rising more than 20%. It’s an interesting story that looks cheap and, if business does rebound, could see the bottom line soar.

As for the stock, PLAY rebounded strongly after its pandemic crash, hitting 52 in March 2021, but it’s been rangebound ever since, hovering mostly between 30 and 50 as the stock bobbed and weaved with the market and was held back by stagnant growth; as recently as October, the stock was still in the low 30s. But the recent quarterly report and improved market environment may have caused a change in character, with shares building on their rebound to surge back near the top of the range. We’re OK starting a position here or on dips of a point or two, with the idea of adding shares on continued strength.

Current Recommendations

Changes Since Last Week:

BYD (BYDDY) Moves from Buy to Hold
Krystal Biotech (KRYS) Moves from Hold to Buy
McKesson Corporation (MCK) Moves from Buy to Sell

We don’t have many losers at the moment, but we’re selling one of the few in part to do some tax-loss selling before the calendar flips, in part because the stock has been fairly uninspiring in a portfolio full of stocks that are mostly acting otherwise. McKesson Corp. (MCK) gets the heave-ho. BYD (BYDDY), long one of our favorite stocks amidst such rapid, Tesla-beating growth, has fallen on hard times enough to get downgraded to Hold – but I still love its bounce-back prospects in 2024 as China heals.

Everything else in our portfolio is either holding up well or absolutely thriving. Like the market as a whole, we close out 2023 in style. Here’s what’s happening with all our stocks.

Updates

10x Genomics (TXG), originally recommended by Carl Delfeld in his Cabot Explorer advisory, had an excellent first week in the portfolio, rising more than 11%! There was no news. Rather, shares are in the midst of a strong recovery period after being sliced nearly in half (63 to 34) from August through October. 10x is a leader in the emerging field of “spatial biology,” a cutting-edge life science for making new discoveries about human health and disease. 10x helps researchers look at the roots of biology. In the third quarter, revenue increased 17%. The stock is up more than 50% in the last six weeks but remains well shy of its late-July highs. BUY

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is down slightly after touching new 52-week highs a week ago. The mid-cap clothing retailer did just announce a 25% increase in the dividend payout, raising it from 10 cents a share to 12.5 cents. The first payment of the higher dividend will be January 19, to shareholders of record as of January 5. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, keeps hanging out in the high 10s, which is impressive after the big gaps up from the low 9s since the start of October. Nothing new here. The stock still has 29% upside to Bruce’s 14 price target. Any break above 11 would be super-bullish. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, exploded higher last week after the Fed meeting, gapping up to 129 from 112 – a 15% jump, and a new 52-week high! We added Blackstone on Mike’s premise that it’s a “Bull Market Stock,” meaning it is an outperformer during bull markets since the more investment activity, the better this company fares. It hasn’t disappointed – we now have a 23% gain on the stock in 4.5 months. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was up another 100 points on earnings to reach new all-time highs! In his latest update, Tom wrote, “It’s another new high! The already strong-performing fabless chip and software company stock rocketed 16% higher over the last week. The reason is because the company reported earnings that impressed the market. Earnings remained solid and Broadcom also cited future earnings gains from its recent VMware acquisition as well as the potential to double AI revenue from $4 billion in 2023 to over $8 billion in 2024. Its chips basically provide the network infrastructure that enables AI systems. The company also received an analyst upgrade with a raised price target.” We now have a 28% gain in five months! I will keep the stock officially at Buy for now, but I would advise only nibbling, and doing so on dips, given how stretched shares are at this point. BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has fallen to new nine-month lows below 52. To do so at a time when U.S. stocks are cooking is a bit of a red flag, but it’s less surprising when you consider that Chinese stocks tumbled another 2% in the last week and are right around 2023 lows. The company certainly hasn’t done anything wrong, and I’m still a big believer in a Chinese rebound in 2024. But you can’t fight the tape, so I will downgrade BYDDY to Hold until it finds a clear bottom. MOVE FROM BUY TO HOLD

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, was up from 42 to 44, its highest point since late September. In his latest update, Bruce noted, “Disney has started to integrate Hulu into the Disney+ streaming service, providing another data point that Disney will be buying Comcast’s stake in Hulu.” CMCSA shares are now just 3% shy of Bruce’s 46 price target, prompting him to downgrade to Hold. We’ll keep it at Buy here, given that it’s still shy of August highs above 47. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, was up another 5% to again hit new 52-week highs! In his latest update, Mike wrote, “Well, CRWD has gotten away from us on the upside since earnings, which is why we’re still sticking with a half-sized position. Of course, that’s a ‘good’ problem to have (something we own that’s running higher), and we’re not anxious to simply chase it higher at this point; a controlled dip of a few percent or more as the moving averages catch up could have us buying more, but for now we’ll just hold what we have. Encouragingly, the cybersecurity group has gone from OK to one of the strongest in the market during the past few weeks, with peers like Palo Alto (PANW), Zscaler (ZS) and even smaller SentinelOne (S) all tagging new high ground in recent days. We think CRWD is the leader both technically and fundamentally, so we’re holding on tightly to what we have and could grab some more on normal weakness. If you’re not yet in, look to start a position on dips of five or 10 points.” Great advice. I wrote last week that you should sell about a quarter to a third of your position if you bought early after our September 5 recommendation. For everyone else, it’s a Buy – but only on dips, like Mike said. BUY

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, has been yo-yoing between 35 and 37 the last couple weeks on the heels of a modest tumble. In his latest update, Mike wrote, “While not abnormal, DKNG did have a sloppy stumble last week, with some heavier-volume selling coming in on no specific news … though it did occur around the time that management was asked about ESPN Bet at a conference. They did make it a point to say all is well (‘We watch this stuff very closely and we’ve seen nothing to suggest that our trajectory is changing’), but management also said, ‘this is a competitive market and we’re going to continue to have to fight for the customer and build great product,’ which some might see as a sign a turf war could re-emerge. What do we think? In general, that the Wild West days in the industry are gone, so the leaders like DraftKings should remain in good shape. A drop below the post-earnings close near 34 (and near the 10-week line) would by iffy and could have us taking action—but right here, with most of the evidence in the bull camp, we’re staying on Buy.” BUY

Dynatrace (DT), originally recommended by Tyler Laundon in Cabot Early Opportunities, has been holding steady at 54 all month after a furious run-up from 43 in November. Keeping at Buy in case of a breakout. Dynatrace is a provider of application performance monitoring software that grew revenues by 26% and EPS by 40% in the third quarter. BUY

Elastic N.V. (ESTC), originally recommended by Tyler Laundon in Cabot Early Opportunities, finally ran into resistance at 117, giving back a few points in the week since. However, ESTC’s recent run prompted Mike to add it to his Cabot Growth Investor portfolio. Here’s what he wrote: “We’re … going to add Elastic, which began to turn itself around in September and then, on earnings two weeks ago, had a coming out party as it’s looking more likely that the firm’s search platforms (really for Big Data applications) will end up being key cogs in upcoming AI systems for big enterprises. Of course, AI revenues are still coming down the road, but even with its traditional Big Data business, its solutions are big in data analytics, which is why growth is solid (17% revenue growth) and earnings are taking off (37 cents per share in Q3, up from a penny the year before and 12 cents above expectations), with analysts seeing 34% bottom-line growth next year (likely conservative). There’s obviously risk as the stock had a big move, but we’re thinking the recent earnings surge is likely a kickoff to better things ahead. We’ll buy a half-sized position and use a loose loss limit (15% to 20% below our cost) for now.” Mike being in on ESTC too (remember, this was originally a Tyler stock) is all the more reason to keep it at Buy. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, keeps hovering in the low 580s, for the most part. The stock is now more than 6% off its early-November highs, which is not that big a dent given the run-up before that. In his latest update, Tom wrote, “This stock is a star with a YTD return of 60% and an average annual return of 55% over the last three years. But LLY has been in a sort of holding pattern for a couple of months. It’s not making new highs, but it hasn’t had a pullback of any significance either. It’s hanging tough at the high point of the recent range after a big surge earlier in the year. Weight loss drug Mounjaro was approved by the FDA last month. Some analysts estimate it could potentially be a $20 billion per year drug. That would match the best-selling drug ever. It still has its Alzheimer’s drug up for FDA approval in the months ahead.” HOLD

Intel Corporation (INTC), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, broke above recent resistance at 45 to reach new 52-week highs, though it has pulled back a tad this morning. In his latest update, Tom wrote, “INTC is bouncing around after the recent surge. The chip maker recently hit a 17-month high and was up over 27% in a month and about 66% YTD. … It’s a good sign that INTC isn’t giving back the recent surge. Earnings indicate that Intel’s turnaround is well on track. It has promising new chips coming out in high-growth areas and its foundry business could be huge. The stock got dirt cheap, and investors are increasingly willing to bet on the company’s future.” That includes us. BUY

Krystal Biotech (KRYS), originally recommended by Tyler Laundon in Cabot Early Opportunities, finally made some meaningful gains, jumping more than 10% to reach its highest point since its early-November nosedive. With shares of this small-cap biotech back above their moving averages and yet still well shy of their 52-week highs (around 130), let’s move this back to Buy. MOVE FROM HOLD TO BUY

McKesson Corporation (MCK), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is down nearly 3% in the last week and just hasn’t budged much since we added it to the portfolio exactly two months ago. In this market, that’s not a great sign. With a very modest loss on it, let’s sell now to get the tax-loss benefit, and open up a spot for a more exciting opportunity in the new year. MOVE FROM BUY TO SELL

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, held firm this past week, as it has for more than a month. There’s been no major news or catalyst of late. Shares are up 54% year to date, and we have a 45% gain in just over nine months. While I don’t expect MSFT to match those returns next year, I do expect shares to keep rising given the company’s leadership position in the artificial intelligence boom thanks to ChatGPT, which launched AI into the mainstream a little over a year ago. If you don’t own shares, it’s worth snatching up a few now in the midst of this extended pause. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, recouped some of its recent losses, jumping to 99 from 96. In his latest update, Carl wrote, “Novo Nordisk (NVO) shares rose to 99, are up over 40% since March, and the Denmark-based company has been the talk of the pharma and medical world this year. New competitor and past Explorer stock Pfizer (PFE) expects the market for new obesity pills to be $90 billion per year and this will be shared with Eli Lilly (LLY), Novo, and other biotechs. Novo is also working on a high-dose version of its current weight-loss pill which is popular and in high demand.” BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, took a well-earned breath after a month and a half of nothing but gains. In his latest update, Mike wrote, “NTNX continues to act pristinely, notching new highs fairly regularly and with only modest dips on down days. Of course, with the 50-day line south of 40, like so many names, a shakeout or rest period wouldn’t surprise. But, overall, it’s looking like the stock’s big breakout September 1 may have kicked off a longer-term advance, as the firm’s leading IT platform is seeing increased adoption and the subscription model (and lifting recurring revenue and free cash flow) is paying dividends. Hold on if you own some, and if not, aim to start small on dips of a couple of points.” Wise words. I advise you to do the same. BUY

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, stretched to new 52-week highs near 38. There was no news, so the stock is likely still getting a boost from two analyst upgrades (from Jefferies and RBC Capital) in the last month. We have an 18% gain on this stock in just over a month. BUY

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, had a very good first week in our portfolio, tacked on another 5.5% to continue its December ascent along with other housing stocks thanks to Jerome Powell and the Fed. Mike elaborated in his latest update: “While not a total surprise, yesterday’s Federal Reserve meeting had the members forecasting three rate cuts next year, which helped the bond market rally further—and that’s likely to both drive mortgage rates lower and firm up any economic weakness that develops, both of which are obviously good things for homebuilders. Even before the latest dip in rates, Toll Brothers’ recent earnings report (for the quarter ended October) effectively confirmed demand remains solid in the sector. Analysts see earnings remaining elevated ($11.25 per share) next year, but the thought is that even that will prove conservative as conditions improve. We averaged up on our position last week and, periodic dips aside, think PHM (and the group as a whole) should see higher prices.” BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, was flat this week, sticking right around all-time highs. We have a 26% gain on this stock in just over six months. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up 6% to hit its highest point in two months. There’s been no major news or catalyst, but no news from Elon Musk in itself can be a catalyst of sorts these days. It’s been a great bounce-back year for TSLA stock even as the company’s sales and, importantly, profit margins have taken a hit in the midst of aggressive cost-cutting on its top models and fierce competition in China from BYD and other upstarts. Despite all that, the stock has more than doubled this year, though it is still well shy of its late-2021 highs. To get back to that level (407 was the closing high), Tesla will need a quarter or two of better sales growth – and a slowdown in its narrowing margins – than it demonstrated in the third quarter. The next earnings report (in late January) will be big. HOLD

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, pulled back a point after hitting new highs above 62 last week. In his latest update, Mike wrote, “UBER has been strong since the market bottom, but news that the stock is going to be added to the S&P 500 next week (news was announced December 1—UBER will be in the index prior to the open next Monday) has sent the stock even higher. That said, it’s worth noting that a stock will often pop before the actual addition (as we’ve seen) but then sag somewhat afterwards, so it’s a good bet we’ll see some retrenchment. Still, the stock should be underpinned by the fundamentals we’ve written about many times, with strong demand and massively expanding EBITDA and free cash flow margins (and with EBITDA making up just 3.1% of gross bookings, there’s plenty of upside potential). We’ll stay on Buy because the big picture remains very positive, but we’d be half-expecting some dips next week.” Indeed, UBER shares are down very slightly in early Monday trading after getting added to the S&P 500. We’ll see where it goes from here. Regardless, UBER has been the best-performing stock Stock of the Week holding outside of TSLA this year. BUY

Varonis (VRNS), originally recommended by Tyler Laundon in Cabot Early Opportunities, added another point to get to new 52-week highs above 45. There was no news. Varonis sells security software that’s used to protect enterprise data, from sensitive files and emails to confidential customer and patient records, financial data, strategic and product development plans and so much more. The company is on track to grow earnings per share by 78% this year, on 5% revenue growth. Right now, Wall Street is loving the story. 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 January 2, 2024.