Cabot Stock of the Week Issue: December 4, 2023

Before Cabot Stock of the Week, there was Cabot Stock of the Month, created by my predecessor, Cabot legend Tim Lutts. After a while, it became clear to Tim that one new stock per month wasn’t enough; it needed to be weekly. Why? Because Cabot, with its full stable of brilliant analysts from across the investing spectrum, is a veritable geyser of great stock picks. And that’s especially true in bull markets.

Therefore, it’s not bragging when I say Stock of the Week is crushing it right now. These aren’t my stock picks, at least not originally. They’re Mike Cintolo’s, Tyler Laundon’s, Carl Delfeld’s, Tom Hutchinson’s, Bruce Kaser’s and Michael Brush’s. And with the market rally back in full force after a banner November, Cabot’s best stock picks – as they often do – are performing even better.

Just look at our portfolio. More than half our stocks have posted double-digit percentage gains, most of them in a matter of months. We have but four losing stocks out of 23, and we’re selling one of them today (see below). Sure, there have been plenty of losing stocks we’ve had to sell along the way this year, as is the case in any investment advisory out there, but overall, the 2023 returns have been solid. Again, this isn’t a victory lap for me; it’s a tip of the cap to my incredibly talented colleagues at Cabot for yet another impressive year of finding diamonds in both the rough and in the fairway (sometimes the best investments are hiding in plain sight!).

Today, we add a stock that’s somewhere in between the rough and the fairway – you might say it lies in the “first cut” of rough that’s easy to hit out of. It’s a new recommendation from Mike Cintolo, and it’s a direct play on the thing that’s been driving this nascent market rally: the idea that interest rates may have peaked.

Here is the stock, with Mike’s thoughts.

PulteGroup (PHM)

The market is a contrary animal, and there might be no better example of a contrary trade in recent years than housing: We can’t imagine many (if any) investors thinking that the housing market would stay afloat after mortgage rates went from sub-3% to around 8% (before some backing off of late). Indeed, the homebuilder fund (symbol ITB) did fall more than 40% from its late-2021 highs to its bear lows in 2022.

But while the group hit the skids with the overall market, it turns out that business for the leading homebuilders never did the same; investors essentially discounted a housing recession that never came. Ironically, higher mortgage rates “locked in” millions of homeowners (if you have a 3% rate, you’re not eager to move and grab a 7%-plus rate), keeping for-sale inventory supply low and prices elevated—and, in turn, providing a soft floor for new home demand since relatively fewer existing homes were hitting the market.

With valuations at extremely modest levels, it set up the huge rally in the first half of the year in the group as investor perception rebounded despite the fact that interest rates moved to new high ground—and now, after a tough pullback in the summer and fall, the leaders are already back in new high ground.

PulteGroup (PHM) is one of those leaders, with a balanced business and intelligent management that has made the right moves to keep earnings elevated during the challenging times, with metrics consistently surprising to the upside. The company’s various brands, including Pulte, Centex, Del Webb, Divosta, America West and John Weiland, make it the third-largest homebuilder in terms of homes closed (behind D.R. Horton and Lennar), and the firm serves a few different types of buyers at various price points—in Q3, first-time home buyers were 38% of home closings, while 37% were move-up buyers and 25% were active adult (an increasing portion of which are paying cash) across more than 900 communities.

What’s amazing here is that, while growth is slowing, sales and earnings have actually been cranking ahead every quarter of the past couple of years. Some of that is thanks to company-specific moves—the firm says its 29.6% gross margin is the best in the industry as it works to get its production cycle back down to pre-Covid levels; the number of work days to build a house was around 90 pre-Covid, spiked to 170 in the years that followed (labor shortages, etc.), but is now 140 days and should get back below 100 in 2024. There’s also a solid share buyback program that’s dropped the share count by 5.5% from a year ago, bolstering EPS.

But most of the story has to do with the resilient housing market, which Pulte is taking advantage of. In the third quarter, net new orders were up 43% in units (up 36% in value) from the year before (which admittedly was during the worst of the economic fears), closings were about flat while prices rose a bit, leading to earnings of $2.90 per share, up 8% from a year ago.

At this point, analysts see the bottom line in the $11.50 per share range for all of 2023 and about the same for 2024, but clearly, the market is looking ahead and liking what it sees—with mortgage rates down about 60 basis points in the past month (and likely headed lower near term given last week’s drop in Treasury rates) and with the Fed having called off the dogs (many see rate cuts next year), it’s not hard to imagine many sidelined buyers jumping at the opportunity in 2024 to grab a new home.

Throw in low P/E ratios (7x earnings), the share buyback support and very little debt, and big investors have been buying—PHM’s summer/fall correction was reasonable (20% deep), and it’s shown great power since the market turn, ripping into new high ground ahead of most of its peers. Near term, Toll Brothers (TOL) reports earnings tomorrow, which could affect the group, and of course, there’s also next week’s Fed meeting, too. But big picture, we think PHM is a leader in a homebuilding group that’s headed higher. BUY

Current Recommendations

Changes Since Last Week:

Alibaba (BABA) Moves from Hold to Sell

As I mentioned in the opening, we do have one Sell today – for the first time in close to a month. It’s Alibaba (BABA). While U.S. stocks are flourishing, Chinese stocks have been either stuck in the mud or retreating in recent weeks, and BABA is among those leading the retreat. In a portfolio of mostly winners at the moment, BABA sticks out like a sore thumb. So, we’ll part ways with it for now, as our timing may have been a bit off.

Otherwise, most of our stocks are acting well, with nearly two handfuls of them still at 52-week (or even all-time!) highs. Here’s what’s happening with all our stocks as we enter the final month of 2023.

Updates

Alibaba (BABA), originally recommended by Carl Delfeld in his Cabot Explorer advisory, keeps falling at a time when most of the rest of the market is rising and has now dipped below all its moving averages. So, it’s time to say goodbye. We added Alibaba on the promise of China’s economic comeback, but it seems we may have been a bit premature. Let’s sell now and possibly revisit when the stock – and China’s economy – begin to finally perk up. MOVE FROM HOLD TO SELL

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, immediately regained all its losses after an unearned earnings blowup two weeks ago. Perhaps investors realized that American Eagle’s earnings weren’t so bad; the company beat top- and bottom-line estimates in the third quarter, with earnings improving 13% year over year and revenues increasing 5%. Also, the company upped its full-year guidance. Or, it’s possible that the real boost came from the banner Black Friday and Cyber Monday for the retail sector as a whole. Regardless, AEO is back near 52-week highs, and the retail sector has some real momentum as consumer confidence finally starts to improve. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, keeps mostly holding its October/November gains on the heels of a strong third-quarter earnings report. Here’s what Bruce had to say about those earnings in his latest update: “On November 16, Aviva provided its third-quarter trading update. Revenues grew at a healthy pace in two major segments, including General Insurance (+13%) and Protection & Health (+23%). Retirement segment growth was positive but not stellar (+2%). Wealth assets had YTD net inflows of new assets equal to 6% of total assets, down 9% from the pace a year ago. Aviva continues to develop its businesses that require less capital support, which allows the company to distribute the excess capital back to shareholders as dividends and buybacks.

“The YTD combined operating ratio – an indicator of profitability – improved incrementally from a year ago. Management reiterated their 2023 target of growing operating profit by 5-7% this year, despite some unusual losses due to Canadian wildfires and two hurricanes, indicating that overall profit growth remains healthy. Capital and related financial strength ratios continue to be robust.

“Aviva reiterated its confidence in paying a roughly 33.4 pence/share dividend. The company also maintained its confidence in meeting its medium-term financial targets.

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

“Aviva shares … have 28% upside to our 14 price target. Based on management’s guidance for the 2023 dividend, which we believe is a sustainable base level, the shares offer a generous 7.7% yield. On a combined basis, the dividend and buybacks offer more than a 10% ‘shareholder yield’ to investors.” BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is nearly back up to its September highs after tacking on another 6.5% in the last week. A $2.3 billion acquisition of pet care services company Rover is perhaps adding to the stock’s recent rally, though usually, the company that’s shelling out all the money in a takeover isn’t the one that gets a boost to its share price. More likely, the renewed appetite for BX shares is its standing as what Mike calls a “Bull Market Stock.” When the market rises, it ascends even faster because it’s an investment management company. Sure enough, while the S&P was up 8.5% in November, BX fared much better, advancing 21.7%. Momentum is clearly there and will likely remain so as long as the market – and market participation – keeps improving. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, is down from its late-November peak, falling another 2.7% this week. It’s doubtful the stock will move much in the coming days ahead of its earnings report this Thursday (December 7), after the market close. Analysts anticipate 5.4% revenue growth and 5% EPS growth; the company has narrowly beaten estimates in each of the last four quarters. We’ll see if a similar beat can right the ship for AVGO shares yet again in the midst of a banner year. BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is in a tailspin, although they’re mercifully up a bit today. Shares of the Chinese EV upstart have fallen from 64 to 53 since mid-November and are well off their late-July highs above 71. Why the sudden weakness from a company that has all kinds of momentum, having topped Tesla in sales for the first time ever last quarter and with revenue growth consistently near triple-digit growth? BYD’s recent price cuts in response to Tesla’s relentless price-slashing program could be one reason. Or it could be the fact that it sold roughly the same number of cars in November (301,000) as it did in October – a rare lack of growth for this booming company. Or, the recent weakness could just be due to China’s continued economic weakness, which has impacted Chinese stock across the board (see BABA, above). In contrast to U.S. exchanges, the Shanghai Stock Exchange is flat since the start of November and is down about 2.5% year to date. Whatever the reason, BYD is going through a rough patch. But I still love its long-term upside and recommend buying at these depressed levels or adding to your position if you previously bought at a higher price. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, has been between 41 and 43 all month, though it’s threatening to finally break out of that range as we write this. In his latest update, Bruce wrote, “Under new leadership since October, the FCC has taken an aggressive regulatory approach toward cable companies like Comcast. The agency is moving to reinstate net neutrality rules, implement specific pricing rules regarding so-called ‘junk fees’ and closely monitor end-user access outcomes. These new rules are likely to hinder Comcast’s flexibility and could produce incremental pressure on its profits.

“Comcast will present at the UBS Investor Conference on December 4 at 9 a.m. ET. The presentation will be live-streamed on the Comcast investor relations website.

“Comcast shares … have 9% upside to our 46 price target.” BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, is up another 9% since we last wrote, soaring to new 52-week highs on a stellar earnings report before pulling back today. In his latest update, Mike wrote, “CrowdStrike has been acting well for a while, and Tuesday night’s quarterly report was another great one that surpassed estimates: Annualized recurring revenue rose 35% to $3.15 billion (very fast growth at that scale), earnings more than doubled as margins expanded and free cash flow was up 37% and totaled 98 cents per share (free cash flow margin was 30%, which is also the target for the full year). And, not surprisingly, the firm reiterated many of the longer-term targets it unveiled a couple of months ago, with free cash flow margins likely to rise to 36% within a few years, operating margins of 30% (up from 22% in this quarter) and total recurring revenue of $10 billion ‘over the next five to seven years.’ There were many nuggets on the conference call, though one that caught our eye was a simple concept, that CrowdStrike is the sector’s consolidator, not via M&A but via a broad-based platform that works and does everything clients need—'liberating organizations from a litany of increasingly ineffective legacy tools, multiple agents, point [one-off] products and fragmented platforms. Illustrating this point, deals with eight or more modules lifted 78% in the quarter.’ The stock had already had a good run, of course, and it’s lifted more after the report, remaining in a firm uptrend. Given the chart, some sort of dip is possible (the 25-day line is down around 197), so we’ll hold our half-sized stake right now … but will look to fill out the position on some sort of exhale in the days ahead. Right here we’ll stay on Buy a Half.” With a 45% gain on CRWD in exactly three months, we will keep it at Buy as well, though aiming for dips – as Mike suggested – makes sense. BUY

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, is down from 52-week highs, dipping from 38 to 37 in early trading today. It’s a well-earned breather for a stock that’s been on a tear, as Mike wrote in his latest update: “DKNG has begun to level off a bit, but given the size of its post-earnings move, the stock looks fine, even after some press surrounding the ESPN Bet launch with Penn National. Interestingly, many are thinking that even the bullish longer-term outlooks released by the company at its Investor Day (EBITDA rising from a loss this year to $400 million next year, $1.4 billion in 2026 and $2.1 billion in 2028) could prove conservative. One big factor: DraftKings reported its current hold rate (how much of all bets it ends up keeping) of 9.5%, but some newer innovations from the firm (like progressive parlays and more) could drive the figure up to levels commonly seen in the U.K. and Australia, with 12% to 13% hold rates. (We’d also note that these projections are only from states that are currently legalized.) We’ll see how that goes, but the bottom line here is the firm is the leader in the field and cash flow should soar going forward. We’ll stay on Buy.” With a gain of 29% in less than four months, so will we. BUY

Dynatrace (DT), originally recommended by Tyler Laundon in Cabot Early Opportunities, is back near its summer highs and has gone nowhere but up for more than a month. There’s been no news, so the improved environment for growthier names is likely responsible for the recent buying, though what started the rally was a third-quarter earnings report in which the provider of application performance monitoring software grew revenues by 26% and EPS by 40%. BUY

Elastic N.V. (ESTC), originally recommended by Tyler Laundon in Cabot Early Opportunities, had a banner third quarter, and the stock gapped up 30 points – roughly 37% overnight – on the news! Tyler put out a special bulletin to his readers elaborating on Elastic’s strong quarter. Here’s what he wrote: “Shares of Elastic (ESTC) have jumped higher today after the company posted an extremely good Q2 fiscal 2024 report highlighted by solid Elastic Cloud revenue and impressive profitability. On the call management talked about how customers are ramping up cloud consumption very quickly and also how Elastic’s generative AI capabilities are driving a resurgence of interest in search and opening up new use cases across a wide swath of end markets. That makes sense when we frame Elastic as the Google of large company enterprise data and consider how, in this era of increasing productivity, workers are trying to do more work, more efficiently and with better end results. In terms of AI, as I discussed in my October writeup Elastic has seen a rise in in customer activity around its ElasticSearch Relevance Engine (ESRE), a platform for building Generative AI applications and Vector Search capabilities. On the Q3 call management confirmed that, once again, adoption of ESRE is very strong. That said, they also were clear to point out that it will take some time for the company to truly make money off generative AI workloads. Market interpretation: if Elastic builds it, they will come.

“On to the numbers ... results from the quarter show revenue jumped 17.5% to $310.6 million (a 2% beat) while EPS improved from break-even last year to $0.37 (a $0.13 beat). Despite the beat management didn’t raise full-year guidance, which still implies 16% revenue growth. A lot of analyst price targets were increased today, though shares of ESTC seem poised to close above most that I’ve seen.” We now have a 42% gain on the stock in less than a month! Given the huge gap up, it would make sense to book profits on a few shares if you got in right around our recommendation in early November. Otherwise, it’s a Buy. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, continued to give back some of its gains after a remarkable first 10 months of the year, falling 1.7% in the last week. But that’s all normal. As Tom noted in his latest update, its blockbuster weight loss/diabetes drug Mounjaro gained FDA approval last month, and “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. LLY continues to hover around the high with no pullback of any significance. Investors are unlikely to sour on the stock with its new drugs and expected 25% annual earnings growth in the years ahead.” HOLD

Intel Corporation (INTC), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is down from 44 to 42 in the last week, with all the losses coming this morning, on no news. Still, the stock’s trajectory is decidedly up, as Tom wrote in his latest update: “Strong earnings, encouraging news about future business, and a much better market environment are turning INTC around. Intel received an analyst upgrade (in November) and rallied nearly 7% on the same day to a 17-month high. … 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.” BUY

Krystal Biotech (KRYS), originally recommended by Tyler Laundon in Cabot Early Opportunities, had a much better week, bouncing off new support at 100 to reach 105 as of this writing. There was no news. We’ll keep at Hold and see if the recovery can continue for this small-cap biotech. HOLD

McKesson Corporation (MCK), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was basically flat in the last week. In his latest update, Tom wrote, “This massive pharmaceutical distributor hasn’t done much since it was added to the portfolio in October. Other sectors have taken the spotlight in the market rebound. But MCK has returned over 23% YTD in a year when most healthcare and other defensive stocks have struggled mightily. It has a business that will continue to thrive even if the economy slows next year. It’s a defensive and growing business and the stock should be a great holding in any environment.” BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, got knocked back along with the other mega-cap tech stocks in the last week, falling 3.6% after rising to new 52-week highs. There was no major news, and a pullback was to be expected for MSFT – and the so-called Magnificent 7 as a whole, which have carried the market for most of the year. Not to worry. Microsoft’s growth story, led by its leadership position in the artificial intelligence boom, plus its ever-expanding Azure cloud computing business, will carry shares higher still down the road. But a short-term pause was inevitable and may last another few weeks. View it as a buying opportunity. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, had pulled back a few percent along with fellow weight-loss-drug superstar LLY. A pullback in both was to be expected given their relentless run-ups this year. We still have a 50% gain on the stock, and this mini-retreat could be a buying opportunity. BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, just keeps hitting new highs! The stock tacked on another 7% in the last week after reporting impressive earnings, though it’s down about 2% from those highs in Monday trading. In his latest update, Mike wrote, “Nutanix’s underlying business remains in great shape, and when combined with its maturing transition to a subscription business model, it continues to lead to excellent results—as we saw in last night’s quarterly report. While revenue growth decelerated to 18%, the more telling figures like billings (up 24%), annualized recurring revenue (up 30% from a year ago and 8.5% from Q2; makes up about 80% of total revenues at this point) operating expenses up just 2% and free cash flow (45 cents per share, up 190% and well ahead of reported earnings of 29 cents) all surpassed expectations and pointed to further good things down the road. Shares popped higher on the news today, which is always a good thing, though like many names we have, NTNX is fairly extended to the upside in the short term. If you already own some, hang on, though if you’re looking to get in, consider starting small or looking for a pullback of a point or two.” That’s good advice, especially with a 22% gain in less than two months. BUY

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, gapped up to new 52-week highs above 34 on an upgrade from Jefferies, which upgraded to Buy from Hold and raised its price target to 41. The reasons for the analyst upgrade include expected fourth-quarter EBITDA growth beyond estimates, and better-than-expected user growth. “We now have more confidence in PINS’s ability to deliver sustainable mid-to-high teens rev(enue) growth with potential upside to 20%+ growth over the next 3-5 years,” the research note said. Those are pretty good reasons to buy. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, just keeps hitting new 52-week highs! Shares are up another 2.4% in the last week and are within “bad-breath distance” (a Tom Hutchinson pet phrase that I love) of all-time highs. There was no news. Shares are likely still riding the wave of the company’s strong third-quarter report, which came out in late October. In the quarter, revenue climbed 25% (to $2.29 billion) while earnings jumped 49% year over year to $2.92 per share. We now have a 23% gain in less than six months. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, were unchanged in the last week, mercifully unaffected by CEO Elon Musk’s ongoing public buffoonery tour. Thankfully, his latest string of moronic comments have nothing to do with Tesla. In good news, the long-awaited Cybertruck is finally here, unveiled with much pomp and circumstance last Thursday. Deliveries for the high-priced (starting at $60,990) vehicle won’t begin until 2025, but it’s a nice new down-the-road revenue stream for a company that’s taken a few lumps in recent months. HOLD

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, was up another 7.5% this week to shatter previous 52-week highs and push to the doorstep of all-time-high territory. Here’s what Mike had to say about it: “UBER remains a super-strong stock, nosing higher on most days regardless of what’s going on in the market. Obviously, there are never any guarantees in the market, but it certainly appears that Uber is moving into ‘liquid leader’ status, with tons of big investors taking and building positions as strong sales and (especially) cash flow growth looks like a very good bet for many quarters to come. Playing into that view is something that is a bit underrated here—as recently as a few months ago, competition from the likes of Lyft could move this stock, but today, it’s clear Uber is the leader in ridesharing. (There is competition in delivery, but both it and DoorDash (DASH) are doing well there.) Of course, at some point, UBER is going to pull in somewhat, so if you’re not yet in, keep it small and/or aim for dips. Still, barring a massive downside move or a break in the overall market, the first pullback after this thrust should be buyable and lead to another leg up.” BUY

Varonis (VRNS), originally recommended by Tyler Laundon in Cabot Early Opportunities, had quite a debut week, jumping to 43 from 40, a gain of nearly 8%, to reach new 52-week highs! There was no news. As Tyler wrote in this space last week, “Varonis (VRNS) 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 benefiting from a successful transition to the SaaS business model and there’s a potential AI boost to consider as well.” The company is on track to grow earnings per share by 78% this year, on 5% revenue growth. Management has labeled AI a “game changer,” saying the technology should continue to boost growth as data governance becomes increasingly important. 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. This week we were joined by Mary Ellen McGonagle, Senior Director of Equities with Simpler Trading and a 30-year market veteran.

The next Cabot Stock of the Week issue will be published on December 11, 2023.