Cabot Stock of the Week Issue: February 20, 2024

The market has finally encountered some turbulence, which is no surprise given the strength of the rally since the start of November. It’s possible artificial intelligence-related stocks have hit a temporary top, or are at least taking a well-earned breather, as tech stocks in particular have pulled back of late, with the Nasdaq down nearly 3% in the last couple weeks. But AI will be back, and so will the market. And I view recent weakness in both as a buying opportunity.

So today, we add a stock that is the latest AI play to go to the moon. Its advance didn’t begin until this month, but it’s already looking like a potential new leader, similar to a few of the other AI-related stocks in our portfolio. One word of caution: Nvidia (NVDA), the unquestioned AI leader, reports earnings tomorrow (Wednesday), so you may want to hold off on buying this new AI addition until after those results are out – just in case NVDA unexpectedly tanks and takes down the entire AI space with it.

But, bigger picture, Mike is high on this stock and made it his top pick in last week’s Cabot Top Ten Trader issue. And it’s pulled back sharply in the last two trading days, which could make for an ideal entry point.

Here it is, with Mike’s thoughts.

Palantir Technologies Inc. (PLTR)

Palantir has seemed perfectly positioned for the AI boom for about a year now: The company’s history as a provider of advanced software and analytical/security platforms for government entities (especially U.S. and friendly militaries) means it’s been leveraging various forms of AI and machine learning for years, putting it way ahead of others when it comes to developing a platform that can be mass adopted not just by governments, but by big companies looking to dramatically streamline operations—and do it in a secure, measured way as well, with systems able to take proprietary or public language models and mine through pretty much any type of “data” even including messaging conversations, video, audio and more. The trick was how long it would take for interest in Palantir’s offerings to result in real sales; Palantir quickly went to work holding individual “boot camps” with firms that showcase how its platform can be used with that potential client, with 565 of these meetings in just the past six months or so. And that has been a big factor in the acceleration of demand among the private sector: In Q4, U.S. commercial revenue surged 70% as the customer count lifted 55% and total contract value inked more than doubled (and rose 42% from the prior quarter!), with new clients (including some huge ones) signing up and existing clients expanding their usage. Of course, from a total-company standpoint, U.S. commercial revenues are still just 22% of revenues, but (a) that’s likely to grow in a big way going ahead, and (b) the top brass had positive things to say about its government business (53% of revenue), which did grow 11% in Q4 and should pick up steam as 2024 moves along and more AI adoption occurs there. Of course, expectations are high, but whereas most of the focus now is on AI infrastructure (chips, networking gear, etc.), Palantir looks like the clear early leader in providing a platform that can offer direct, meaningful savings to big companies (and, eventually, governments) around the globe. It’s a huge idea.

As for the stock, PLTR went wild during the initial AI move last spring, soaring on six straight weeks of big-volume buying and eventually making its way up to round-number resistance near 20 in July—but that ushered in a very choppy, tedious few months, with the stock dipping as much as 30% and sitting at 16 (and tagging its 40-week line) two weeks ago. But the Q4 report changed all that, with a huge earnings move coming on out-of-this-world volume. Volatility is sure to continue, so use a loose leash, but the path of least resistance is now up.

Current Recommendations

Changes Since Last Week:
Dynatrace (DT) Moves from Buy to Sell

Most of our stocks have held up fairly well despite some market weakness in the last week, but Dynatrace (DT) is an exception, which means, in a crowded portfolio, it has to go. Fortunately, we’re getting out with a mild profit on it.

As for the rest of our stocks, some pullbacks were to be expected given many of their relentless rallies in recent weeks and months. Some, however, continue to hit new highs, including TRIP, UBER and our twin GLP-1 leaders, LLY and NVO.

Let’s get into it.

Updates

10x Genomics (TXG), originally recommended by Carl Delfeld in his Cabot Explorer advisory, dipped from 49 to 47 after reporting earnings last Thursday. While revenue ($184 million) narrowly topped estimates and increased 17.8% from the same quarter a year ago, EPS losses (-$0.41 per share) were much wider than they were a year ago (-$0.15) and steeper than the 36-cent per-share loss analysts were anticipating. It was the fourth straight quarter 10x’s bottom-line results had fallen well short of estimates, so this is becoming a nasty habit for this mid-cap gene sequencing biotech. However, the damage thus far has been minimal; in fact, the stock is up from 42 when it started the month and had been on a mini-tear headed into the report. Let’s see how it reacts this week. A dip back to the 42-43 range would likely prompt us to sell. For now, keep holding. HOLD

Alexandria Real Estate Equities, Inc. (ARE), originally recommended by Tom Hutchinson in the Safe Income Tier of his Cabot Dividend Investor advisory, is about where it was a week ago (119) despite some ups and downs. There was no news. In his latest update, Tom wrote, “The life science property REIT has a unique and growing property portfolio. But it has been trading like a volatile REIT, which has been a bad thing lately. It was down more than its peers the last two years. It rallied much more than the sector the last two months of last year. And ARE is down more in the rough start for REITs this year as interest rates have spiked higher in the better-than-expected economy. But the company is strong operationally, and the stock sells at a compelling valuation with reliable earnings and should have a solid year as interest rates peak and perhaps trend lower.” HOLD

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, mostly held its gains from the previous week after finally breaking out of the 19-to-20 range. There was no news. Earnings are due out March 7. We have a 26% gain on AEO in less than four months. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, is breaking to new highs today. If it holds this morning’s gains, it will be a new 52-week high! There was no news for this U.K.-based life insurance and investment management firm. Shares still have 24% upside to Bruce’s 14 price target – and a 7.1% dividend yield to boot. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been up and down along with the market of late, with 130 being the ceiling and 120 being the floor. As long as the bull market remains intact, however, this mega-cap will remain in our portfolio, as a “Bull Market Stock” (Mike’s term) that tends to outperform in strong markets. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, has fallen sharply the last two weeks since topping out at 1,283 and was down more than 4% this past week. Considering the run-up prior to that, some weakness isn’t cause for alarm … yet. Two upcoming events will likely determine which way AVGO heads next: Nvidia’s (NVDA) earnings report tomorrow, since NVDA is the leading artificial intelligence company and AI has been the biggest reason for Broadcom’s recent strength. Then, on March 7, Broadcom will report its own earnings. The stock is still comfortably above its moving averages, so you could certainly buy this dip, though you may want to wait until after the NVDA report on Wednesday. BUY

Cisco Systems, Inc. (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Value Investor, is down from 50 to 48 after reporting earnings last Wednesday. Here’s what Bruce had to say about those earnings: “On February 14, Cisco reported an average quarter but forward guidance was weak as the revenue slowdown rolls on. Adjusted earnings of $0.87/share fell 1% but were 4% above estimates. Revenues fell 6% but were in line with estimates. Fiscal third-quarter and full-year guidance was cut as demand, notably by telecom and cloud customers (and, geographically, Asia Pacific/Japan) remains weak.

“Cisco said that customers continue to digest their aggressive purchases from prior quarters. One lingering problem, though, is that demand appears to be weakening for cyclical reasons, as businesses pull back in general on tech spending. Cisco’s 12% drop in new orders only adds to this concern, although the comparison was against strong order growth a year ago. And, despite the fall-off in new orders, the backlog continues to move upward.

“The gross margin expanded to 66.7% from 63.9%, continuing the sharp improvement we saw a quarter ago in what appears to be a permanent step-up. Higher expenses weighed on operating profits, which fell 5%. The company is cutting 5% of its workforce to adjust. Cisco’s share count fell as it repurchased $1.3 billion of its shares in the quarter. The balance sheet is cash-heavy but most of this cash will vanish with its purchase of Splunk, assuming the deal is approved by regulators.

“The company raised its quarterly dividend by 1 cent, to $0.40/share.

“Cisco shares remain attractive given their reasonable valuation and the company’s strong cash flow production. But, we are incrementally wary that the business cycle is turning against Cisco. For now, we will stay the course with our Buy rating.

“CSCO shares fell 3% in the past week and have 36% upside to our 66 price target. Based on 2024 estimates, unadjusted for the Splunk acquisition, the valuation is reasonably attractive at 9.3x EV/EBITDA and 12.9x earnings per share.”

Not a great first month in the portfolio for this stock, but given the upside, we will keep it at Buy for now. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, was down a little more than 2% after a big run-up the previous week. In his update last Thursday, Mike wrote, “CrowdStrike (CRWD) was very impressive yesterday, falling sharply at the open but quickly snapping back and actually closing in the green despite the market selloff. The firm has been mostly quiet on the news front, though it did ink a deal with a distributor in the U.K., which doesn’t hurt. Earnings are due March 5, which will be key, but CRWD has been one of the big leaders of this rally and remains so today. As an aside, we’ve gotten some questions about whether it’s OK to take some partial profits up here, and our general response is: Sure, if you have a ‘big’ stake (whatever that means to you) and want to lighten up, there’s nothing wrong with that. However, for the Model Portfolio, the position size isn’t huge, so we’re inclined to just hold what we have and see what comes. If you’re not yet in, try to pick up a small position on pullbacks or shakeouts.” BUY

Dave & Buster’s (PLAY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has mostly held its gains after a big run-up the first half of February – an encouraging sign. This is a long-overdue retail turnaround story, as Dave & Buster’s family-friendly sports bar chain is benefitting from a return to normalcy in a post-Covid world. The stock is following suit, trading right around five-year highs. BUY

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, is down sharply today (about 6.5% as of this writing) on the heels of a mixed earnings report last Thursday. The headline numbers were good: 43% revenue growth, 29 cents per share in earnings, up from a 14-cent loss per share a year ago. But GAAP earnings amounted to a 10-cent loss, and revenue growth was actually shy of estimates (45%). However, monthly unique players (MUPs) jumped 37% to an average of 3.5 million, and average revenue per user improved 6% to $116. The company added Vermont as its 26^th state in early January and will go live in North Carolina on March 11 – just in time for March Madness in a basketball-mad state. So, the company’s expansion won’t be slowing anytime soon. Given the growth, I’d view this mini-pullback as a buying opportunity. BUY

Dynatrace (DT), originally recommended by Tyler Laundon in Cabot Early Opportunities, has imploded, and it’s time to sell. Shares have been selling like hotcakes since the company’s earnings report two weeks ago, which was mostly fine, but lowered annual recurring revenue (ARR) guidance for the March quarter has seemingly stuck in investors’ craw. The stock is down 16% in the last two weeks and is hitting its lowest point since November. In a crowded portfolio, there’s no room for a stock with that kind of nosedive. Let’s get out with a mild gain (6%) and use the profits on opportunities with more momentum. MOVE FROM BUY TO SELL

Elastic N.V. (ESTC), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down from 127 to 125, though has not yet dipped to February lows around 122. In his latest update, Mike wrote, “Elastic (ESTC) isn’t the strongest thing out there, but it continues to act reasonably well, with yesterday’s morning dip close to the 50-day line (near 116) finding support. If this market pullback continues and ESTC really gets hit, we could go to Hold and even prune some shares, but at this point, the story, numbers and chart all remain pointed up. Earnings are due March 1.” BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, tacked on another 5% to hit new highs! Another strong earnings report two weeks ago continues to be the driving force, as Tom wrote in his latest update: “Lilly again killed on earnings and guided higher for 2024. LLY, like AVGO, surges higher and then levels off for a brief period before the next surge higher. The big pharma superstar crushed expectations on earnings. It’s highly watched, newly approved weight-loss drug Zepbound more than doubled sales expectations for the quarter. The mega-blockbuster potential is enormous and Lilly just opened a $2.5 billion plant in Germany to crank up production to meet soaring demand. The company also has an important Alzheimer’s drug awaiting FDA approval in the next few months.” We now have a 131% gain on the stock in just 11 months! Keeping at Buy, but as I’ve written for the last couple weeks, those of you who bought shortly after our March 21, 2023, recommendation should sell up to a third of your original position if you have not already done so. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, is back with a vengeance after a brief dip and is threatening to top the 52-week high it hit above 13.9 earlier this month. There was no news, though the cannabis sector as a whole has been gaining momentum as we near a potential ruling from the Drug Enforcement Administration (DEA) on whether marijuana should be rescheduled from a Class I drug (very harmful) to a Class III (not very harmful), as recommended by the Food and Drug Administration (FDA). Add in the fact that Green Thumb’s own earnings are due out February 28, and there are a lot of potential catalysts here. BUY

Intel Corporation (INTC), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, has been holding steady since its sharp earnings decline in late January. In his latest update, Tom wrote, “The red-hot chipmaker finally cooled off after earnings guidance disappointed and the stock fell from the recent high. But it has since leveled off and the selling may be over for now. The bounty from the new chips and the foundry business might not come as soon as optimistic investors had been hoping. The future is still bright. There are great days ahead. But the recent spate of good news had investors hungry for more. They didn’t get it from the earnings report. But headline risk favors the upside for this stock in the months ahead.” For now, we’ll keep INTC at Hold. HOLD

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, gave back most of its gains from the previous couple weeks as the market – and AI plays in particular – has cooled off. But any cooling off of AI fever is likely temporary, and the company announced today that it will expand its AI infrastructure in Spain with a $2.1 billion investment. So, MSFT likely won’t stay down long. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, just keeps humming along, adding another two points this week. There was no major news, but the market for its Ozempic and Wegovy weight-loss drugs (and Lilly’s Mounjaro) continues to grow. An $11.5 billion acquisition of drug manufacturer Catalent, with the intent of boosting its Wegovy supply, has also been driving up the share price. There’s no slowing the GLP-1 trend right now, and we have two huge winning stocks as a result. BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains at 56 after some ups and downs. In his latest update, Mike wrote, “Nutanix (NTNX) continues to act just fine, briefly slicing its 25-day line yesterday morning before bouncing back in the afternoon and today. After a mostly straight-up run since October (up 14 of 15 weeks!), we’re more comfortable on Hold, especially as earnings are coming in two weeks (February 28)—though shares have been mostly marking time since late January, so a bit more rest and a positive earnings reaction could provide an opportunity for new buying. Right here, though, we’ll just hang on.” We’ll keep our rating at Buy, but it’s probably prudent to wait until after the earnings report to start a new position. BUY

PayPal (PYPL), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has been chopping around in the 56 to 60 range of late. Recent earnings were fairly mixed: earnings rose 19% to $1.48 per share on an adjusted basis, revenue expanded by 9%, and the company processed over $1.5 trillion in total payment volume, up 13% from the year before. This was offset by lower guidance for all of 2024. Wall Street seems unsure of which numbers to focus on, given the volatility. But looking at the stock from a longer-term perspective, shares are dirt cheap, trading at 11.5 times forward earnings and at a small fraction of their 2021 highs above 300, and yet are in an uptrend, advancing more than 13% since the start of November. BUY

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, dropped another point this week following a mildly disappointing earnings report the previous week. But shares were trading at new highs prior to the report and are still up more than 10% in the last three months. Let’s hang in there. BUY

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, keeps holding in the 102 to 109 range, though it’s testing the low end of that range. In his latest update, Mike wrote, “PulteGroup (PHM) is sagging alongside interest rates, and to respect that action, we went to Hold in yesterday’s bulletin. Truth be told, though, we don’t think the selloff is bad at all given the move in interest rates—the 10-year Treasury yield, which is what most mortgage rates are based on, has quickly spiked from a low near 3.85% on February 1 to 4.30% today—and we’d note that many building supply stocks haven’t budged. Of course, we won’t just hold and hope: If PHM really breaks open, we’ll take our modest profit and move on, but we’re still optimistic that, big picture, Pulte’s business could easily surprise on the upside this year, especially if/when the Fed finally starts to ease.” Still trading roughly in line with its 50-day moving average and well above its 200-day line, we’ll keep PHM at Buy. BUY

Qualcomm, Inc. (QCOM), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was down about 2% in its first week in the portfolio. In his latest update, Tom wrote, “After a strong start to this year, QCOM pulled back after a solid earnings report. The pullback was more about the absence of exciting news rather than bad news. But the stock has since rebounded sharply. It should be a good year. The Semiconductor Industry Association is forecasting 13% growth in worldwide chip sales this year. Leaders like Qualcomm should experience a much higher level of growth than the overall industry. Qualcomm is introducing new AI chips for PCs and smartphones that could be big sellers this year.” BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, has turned south in the last couple weeks, shedding about 8.5% after touching new highs above 800. There’s been no news, so this looks like normal consolidation after a big run. We still have a 33% gain on this large-cap software stock. Shares are currently testing support at the 50-day line, so a dip below that level could prompt us to move to Hold. For now… BUY

Soleno Therapeutics (SLNO), originally recommended by Tyler Laundon in Cabot Early Opportunities, keeps holding around 48 and has been in a range between 45 and 49 for the last month. There was no news. Soleno Therapeutics is a development-stage biotech company that burst onto the scene last September when its lead drug candidate, DCCR (Diazoxide Choline), was found to make a highly significant difference in a long-term study for the treatment of Prader-Willi syndrome (PWS). While approval of DCCR this year is not a given, the odds are massively tilted in SLNO’s favor. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, keeps meeting resistance every time it gets into the 190s, though it touched 200 late last week. Price cuts at Ford are being deemed the culprit behind today’s 5% pullback. The stock could probably use some good news to get back above 200 for more than a few hours. But, it does look like a firm bottom was put in at 181 in early February, following the company’s latest disappointing earnings report. Hold for now. HOLD

Tripadvisor (TRIP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was our best performer this week, vaulting to 27 from 23 after a strong earnings report last Wednesday. The company reported record revenue and earnings per share ($0.38) blew analyst estimates ($0.22) out of the water. Revenues of $390 million were up 10% from the same quarter a year ago. It all supports Mike’s original thesis here that the U.S. travel boom continues in a post-Covid world, and we are reaping the rewards, with gains of 39% in just over a month! BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, is off to a banner start to 2023, spiking to new highs above 81 last week before pulling back in the last couple trading days. Mike explained what was behind the latest surge: “Uber (UBER) already reported a fine quarter last week, but today’s Investor Update stole the show: While the presentation had tons of details over a few dozen slides, the main takeaway was the three-year view, with management expecting 2024 to 2026 to see gross bookings lifting mid- to high-teens annually, while EBITDA soars ‘high 30% to 40%’ and free cash flow totals 90% of EBITDA (up from 60% during the past three years), which obviously means humongous growth. To go along with that, Uber announced a $7 billion share buyback plan, though it will start mostly to offset dilution (from stock options, etc.). UBER popped on the news today, roaring to new highs on big volume, which is obviously good to see. We’ll stay on Buy, but at this point new buyers should aim for dips of a few points or a rest period of a couple of weeks.” We now have a 123% gain on the stock in a year (!), so if you haven’t already done so, I strongly recommend selling a few shares – maybe a quarter to a third of your original position – to book some profits. BUY

Varonis (VRNS), originally recommended by Tyler Laundon in Cabot Early Opportunities, gave back a couple points after a big earnings-fueled run-up the week before. Perfectly normal. Plus, the earnings were good: Both annual recurring revenue (ARR) and free cash flow beat analyst estimates for the quarter, providing evidence that last year’s switch to a Subscription-as-a-Service (SaaS) model is working for this provider of cybersecurity solutions. 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 February 26, 2024.

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