Cabot Stock of the Week Issue: December 27, 2022

This is our final issue of 2022, which I’m sure those of us who invest are happy to say good riddance to. True to this year’s form, stocks have mostly shunned the famed Santa Claus rally thus far, and the indexes have slipped closer to their October lows. Will they break through those fast-approaching lows and keep plummeting to new depths? Or will they bounce off them and finally begin a sustained, meaningful rally once the calendar mercifully flips to 2023? We’ll find out very soon.

In the meantime, we’re adding a second healthcare-related name in three weeks, though this one is a mega-cap that’s had a very good year – it’s up 19% in 2022, which is like a double in any normal year. It’s a Danish company that strives to cure, or at least put a dent in, America’s obesity epidemic. It was recently recommended by Cabot Explorer Chief Analyst Carl Delfeld, and here are Carl’s latest thoughts.

Novo Nordisk (NVO)

It’s quite clear that obesity shortens lives. It is linked to more than 60 chronic diseases, including diabetes, heart disease, stroke, and some forms of cancer. These represent the leading causes of preventable, premature deaths.

Scientific studies show that the obesity epidemic threatens the lives of 100 million Americans and half a billion more people overseas. The proportion of American adults who are considered obese has nearly doubled over the last 60 years, to 40%. Aside from the premature loss of life, obesity costs Americans about $150 billion each year and people with obesity pay $1,429 more in medical costs each year compared with those of average weight.

Even those that eat healthy and exercise regularly can struggle with weight issues, and Danish pharmaceutical multinational Novo Nordisk (NVO) is trying to help.

Obesity is a complex chronic disease, and losing weight is not just a question of eating less and exercising more. In fact, obesity can be influenced by genetics, physiology, brain activity and the environment. Better understanding these factors is critical because obesity is associated with other diseases, including type 2 diabetes, heart disease and certain types of cancer.

Novo specializes in treatments for diabetes, hemophilia, and obesity. The company supplies half of the world’s insulin, and its diabetes care products are used by over 34 million people today.

Novo highlights that more than 750 million people are currently living with obesity and that this is up a multiple of 3X since 1975. By 2025, it estimated the potential market for obesity-related ailments will be $1.2 trillion.

The company also has developed a new drug that lets people lose as much as 20% of their body weight. This drug is based on decades-old research that shows a hormone called glucagon-like peptide-1 – or GLP-1 – is released after food intake. This hormone boosts insulin levels and reduces appetite. In its natural form, it lasts only a few minutes in the blood, but Novo has developed injectable products for diabetes that imitate the effects of GLP-1 and last longer.

After clinical trials showed that this treatment is both safe and effective, the U.S. Food and Drug Administration (FDA) approved Novo’s treatment in 2014.

In 2017, Novo introduced the follow-on Ozempic, a once-a-week injectable treatment for diabetes that is even better at reaching brain receptors that limit food cravings. Novo got FDA approval to market this product in June 2021 and branded it Wegovy (pronounced wee-GOH-vee). Prescriptions started at 10,000 a week and soon doubled to 20,000 a week.

Today, Wegovy is one of the fastest-growing drugs in the nation. Fortunately, the use of Wegovy is also associated with lower blood pressure, better cholesterol readings and less inflammation, likely leading to less hypertension, heart disease, stroke, cancer and perhaps even dementia. Studies to clinically prove all of this are underway.

Novo’s total sales already exceed $167 billion a year and for the quarter that ended in September, earnings were up 19% on a 28% increase in revenue. Novo is also executing a $3 billion share repurchase plan. In summary, based on its sizable and growing demand for this weight-loss drug, this well-managed, highly profitable company with an excellent growth profile has limited risk and potential to develop new products. Its stock is outperforming the market, indicating relative strength.

Current Recommendations

Changes Since Last Week’s Issue:

Enphase Energy (ENPH) Moves from Buy to Hold
Green Thumb Industries (GTBIF) Moves from Buy to Hold
NerdWallet (NRDS) Moves from Hold to Sell
Wingstop (WING) Moves from Buy to Hold

We have three downgrades and one more Sell this week, keeping our portfolio at 17 stocks as we enter the new year. That’s a lot of stocks on the heels of such a historically down year for the market, but it speaks to how well most of our positions (with one VERY big exception) have held up of late. Still, the three downgrades, which include arguably our best performer of 2022, reflect the recent weakness in the midst of one of the worst Decembers for stocks on record. But it’s not all doom and gloom: Ulta Beauty (ULTA) is putting the finishing touches on a stellar year, while Xponential Fitness (XPOF) looks poised for a 2023 breakout, perhaps next month.

Here’s what’s happening with all our stocks as we enter what’s sure to be (fingers crossed!) a far more profitable new year.

Updates

Arcos Dorados (ARCO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, finally broke out in a big way last week after months of being stuck in the 7s. The stock broke above 8 for the first time since March on no news, giving us a decent double-digit gain on the world’s largest independent McDonald’s franchisee.

In his latest update, Bruce wrote, “Macro issues have a sizeable impact on the shares’ trading, including local inflation and the Brazilian currency. Since early 2020, the currency has generally stabilized in the 1.00 real = $0.20 range – a remarkably favorable trait given the sharp declines in other currencies around the world. Recent weakness in the U.S. dollar has not affected the US/Brazilian real exchange rate. As the company reports in U.S. dollars, any strength in the local currency would help ARCO shares.

“Arco said it will announce fourth-quarter earnings and hold its annual investor day on February 2, 2023, at 7:30 a.m. Eastern Standard Time.

“ARCO shares rose 7% this past week and have 8% upside to our 8.50 price target. The shares are re-approaching their post-pandemic high.” BUY

BioMarin Pharmaceutical Inc. (BMRN), originally recommended by Mike Cintolo in Cabot Top Ten Trader, tumbled about 3.5% last week on no news. Mike still likes the stock as a potential industry leader in the biotech space. In his latest update, Mike wrote, “BioMarin (BMRN) continues to act just fine in the wake of its breakout in late November, with the latest dip looking very controlled thus far. If you didn’t buy it a couple of weeks ago, we’re OK taking a stab at it in this range, with a stop in the low/mid-90s.” BUY

Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, was down another point this past week, dipping from 32 to 31. We’ll keep it at Hold since we still have a modest return on it. But the stock needs to stop the bleeding soon, having fallen from a high of 54 just three months ago, in early September.

In his latest update, Carl wrote, “Centrus Energy (LEU) surprised investors as it came out with a quarterly loss of -$0.42 per share versus the Zacks consensus estimate of +$0.78. This compares to earnings of $2.95 per share a year ago. This nuclear fuel supplier for utilities in the U.S. and abroad has net income margins that are above 50% so far this year with new nuclear fuel sales contracts and commitments worth an estimated value of $270 million.

“Nuclear power provides 20% of the power for our electricity grid and more than 50% of U.S. emission-free energy, according to the Department of Energy.” HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, held firm this past week. It appears to be building an encouraging-looking base at 47. 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.

“There was no significant company-specific news in the past week.

“CSCO shares … have 39% upside to our 66 price target. The valuation is attractive at 9.4x EV/EBITDA and 13.4x earnings per share. The 3.2% 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, remains stuck in the same 34-36 range it’s been in for the last six weeks. In his latest update, Bruce wrote, “With $120 billion in revenues, Comcast is one of the world’s largest media and entertainment companies. Its properties include Comcast cable television, NBCUniversal (movie studios, theme parks, NBC, Telemundo and Peacock), and Sky media. The Roberts family holds a near-controlling stake in Comcast. Comcast shares have tumbled due to worry about cyclical and secular declines in advertising revenues and a secular decline in cable subscriptions as consumers shift toward streaming services, as well as rising programming costs and incremental competitive pressure as phone companies upgrade their fiber networks.

“However, Comcast is a well-run, solidly profitable and stable company that will likely continue to successfully fend off intense competition while increasing its revenues and profits, as it has for decades. The company generates immense free cash flow which is more than enough to support its reasonable debt level, pay a generous dividend (recently raised 8%) and sizeable share buybacks.

“There was no significant company-specific news in the past week.

“Comcast shares … have about 22% 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 59. Barely holding above its 200-day moving average, as well as its October lows at 57, we’ll hang on for now. In his latest update, Carl wrote, “Corteva (CTVA) shares were steady this week as the company announced it will cut some U.S. jobs next year as it exits from Russia. This is aside from any changes due to its agreement to buy biologicals firm Stoller Group with operations in 60 countries for $1.2 billion.

“Corteva uses emerging technology to help farmers improve crop yields and boost output. While the market is down sharply over the past year, CTVA is up more than 25%. Although the down market does lead to quality companies growing 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%.” HOLD

Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had its worst week in a while, down more than 9% to hit its lowest level since early November. The long-term trend is still up, and the stock is still well above its 200-day moving average (though below its 50-day now), but the precipitous drop-off – on no news – is enough to downgrade the stock to Hold, as Mike did last week. MOVE FROM BUY TO HOLD

Green Thumb Industries (GTBIF), originally recommended by Tim Lutts and then Michael Brush in the Sector Xpress Cannabis Advisor, has fallen off a cliff in December after an encouraging October and November. Since December 5, the stock has lost nearly half its value! Most of those losses are due to the failure of the SAFE Banking Act to pass through Congress, though there’s still a chance it will soon. I can’t in good conscience recommend buying the stock on the mere possibility of that pro-cannabis legislation being pushed through, so I’ll downgrade the stock to Hold. It appears to have established a bottom right around 8; if it breaks below that level, we’ll sell. But considering the stock is down less than a point in the last three months, and is comfortably above its July lows, we’ll hang onto it in for now, with the hope that the cannabis sector gets some good news in January. MOVE FROM BUY TO HOLD

Kinross Gold (KGC), originally recommended by Clif Droke in his Sector Xpress Gold & Metals Advisor, remains in a range between 3.95 and 4.38. A break higher could be coming if and when the market gets its act together again, so we’ll keep it at Buy. BUY

NerdWallet (NRDS), originally recommended by Tyler Laundon in Cabot Early Opportunities, simply hasn’t performed in the month since this fintech growth stock has been added to the portfolio, falling from 12 to 8. It’s now our biggest loser, so let’s Sell, collect the year-end tax break, and open up another spot for a better opportunity in the New Year. MOVE FROM HOLD TO SELL

NextEra Energy (NEE), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was flat in its first week in the portfolio. In his latest update, Tom wrote, “Utility stocks were the worst-performing market sector in the fall selloff as interest rates soared to 15-year highs and fixed-rate alternatives became more attractive. NEE fell over 22% in about five weeks to near the 52-week low. But the selling was overdone.

“The interest rate trade is being reversed. But it’s also true that utility stocks are among the very best stocks in a recession. One of the best recession stocks got cheap ahead of a likely period of historical outperformance. NEE has moved sharply higher from the October low and already regained most of what was lost in the fall. Sure, NEE isn’t as cheap as it was but it has established a solid upside trend and has momentum.” BUY

Realty Income (O), originally recommended by Tom Hutchinson in Cabot Dividend Investor, is holding smack in the middle of the 61–65 range it’s been in for the past two months. In his latest update, Tom wrote, “Sure, the rally from the October low ran out of gas. The stock has been on a sideways and bouncy track for the last month. But it held up remarkably well in the latest round of selling, which took down just about everything else. Investors appear to be coming around and appreciating a defensive and legendary income stock amid the current uncertainties. I expect more of the same in the early part of next year as we move toward a recession and possibly a new market low.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, just keeps falling. In the last three months, the stock has lost more than 60% of its value, and the stock is down more than 70% from its November 2021 highs. Simply put, TSLA has been the worst-performing mega-cap stock of 2022 – which is really saying something. The reasons behind the decline have little to do with the company itself, which is still growing quite impressively, particularly given its size, but the man running the company, Elon Musk. Everything Musk has done this year, especially his bizarre antics involving his new toy, Twitter (and buying Twitter in the first place), have made people – including those on Wall Street – question whether he’s capable of successfully running a company anymore, including Tesla. And so institutional investors keep selling their TSLA shares. Should you? Again, this portfolio is in the very unique position of sitting on a massive, life-changing gain in TSLA, since Tim Lutts, my predecessor and Cabot Stock of the Week founder, had the foresight (as did Mike Cintolo) to recommend the stock in December 2011. But if you’ve bought the stock in the last two years, you’ve lost money. I can’t possibly rate TSLA a Buy at the moment with the way the shares are in complete freefall. But if you bought earlier this year, or even last year, I wouldn’t argue with you if you’ve had enough and want to get out now. If you bought TSLA any time prior to 2021, however, I’d hang on to them. At some point, the stock will stop falling, and shares will bounce back. It’s still too strong – and fast-growing – a company for that not to happen. A year from now, chances are TSLA shares will be higher, perhaps MUCH higher. Right now, though, they are virtually unbuyable. So I’ll stick with my Hold recommendation, and trust that 2023 won’t be nearly the disaster for Tesla that 2022 has been. HOLD

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was back with a vengeance this week, rising against the market’s tide to advance 4.5%, though shares remain below their December highs. After a brief sell-off, investors keep coming back to third-quarter earnings, which were reported on December 1 and were excellent. 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. ULTA was one of our strongest performers in 2022 and looks poised for another solid year in 2023. BUY

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, is down another 2.5% since we last wrote. In his latest update, Mike wrote, “Wingstop (WING) has hit the toboggan slide with the market since the Fed last week, nosing below recent support (both price and its 50-day line) as it fills the earnings gap from late October. It’s not fun and we’re not complacent, but we’re willing to give WING some more rope as (a) the overall chart looks OK (near its August high) and (b) the latest slide has come on super-light volume—that’s not an excuse, but it wouldn’t take much buying to boost the stock in our view. Even so, we’ll switch to hold to respect the weakness in the stock and the market and keep a close eye on it going ahead.” Let’s downgrade to hold as well. MOVE FROM BUY TO HOLD

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is holding firm in its 34–37 range. 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 with an emphasis on income and value. BUY

Xponential Fitness (XPOF), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, has been building a nice-looking base in the 21-22 range while most other growth stocks have fallen sharply. A breakout similar to the one it had in November could be forthcoming … IF the market can shake off the cobwebs. The company is the leading franchisor of boutique fitness studios in the U.S., and it recently expanded its growing international presence by inking a master franchise agreement in Japan that 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 January 3, 2023.