Cabot Stock of the Week Issue: February 5, 2024

The market survived a busy week of tech earnings and Fed posturing to reach new highs, even if they were again dragged there by the Magnificent Seven – Amazon (AMZN), Meta (META) and Nvidia (NVDA) in particular. Unlike November and December, most stocks have stagnated through the first month and change of 2024, as the S&P Equal Weight Index (SPXEW) is actually slightly down for the year, while small caps are down more than 1%. But volatility remains low, all the economic data (jobs growth and GDP growth hotter than expected, earnings growth at 1.6% halfway through fourth-quarter reporting season) remains strong, and it seems Wall Street has quickly accepted that Jerome Powell and company are unlikely to start cutting rates as soon as March. So, there’s every reason to believe the market – and not just the Mag Seven – has plenty more upside in the weeks and months to come.

With that in mind, today we add a fallen growth stock that was once a market darling but quickly fell from grace in the bear market of 2022 and 2023. Now, it’s showing signs of life again. Carl Delfeld recently added the stock to his Cabot Explorer advisory, and here are Carl’s latest thoughts on it.

PayPal (PYPL)

While every situation is different, a pretty good rule of thumb for investors is to look for stocks of well-run companies with solid fundamentals in a sector that has been out of favor. Then check that the stock is in an uptrend with clear catalysts that support a further rise in its stock price.

This is the situation with PayPal (PYPL). The stock is down over the last year but since this past fall, it’s in a clear uptrend, up 20% in the last three months. It is at the center of payments and fintech. And the stock is trading at a relatively low valuation (11 times forward earnings) despite a return on equity near 20%.

Late last month, a partnership with the payments company Venmo was announced. Alex Chriss, PayPal CEO, talked about the new initiative:

“PayPal is introducing six new innovations that will not only solve real customer pain points, but we believe will change the world of payments and commerce. From new solutions for merchants to speed up checkout and personalize offers, to a new consumer app that will give our loyal customers more reasons to shop with PayPal, to the next generation of Venmo designed to be the growth platform for local small businesses, PayPal has always brought the future of money to our consumers and merchants and today marks the next revolution.”

There are several other indications that PayPal may be undervalued with catalysts that could support a continued uptrend.

First, PayPal remains a digital payment giant. With 430 million active accounts generating over $1.5 trillion in payment volume annually, PayPal retains a strong leadership position in the e-commerce payment ecosystem.

Second, PayPal has been cutting costs and expanding margins and earnings growth. The goal is to reduce expenses by $900 million and this will directly boost profitability in 2024 and beyond. Third, PayPal’s new CEO is spearheading an innovation drive. Instead of playing defense, PayPal is doubling down on growth efforts started under former CEO Bill Ready such as boosting crypto capabilities and developing a super app ecosystem.

We can capitalize on this blend of fintech value and innovation by buying PayPal shares while they remain on sale – but are beginning to build momentum.

One important thing to note: PayPal reports earnings this Wednesday. Solid results are expected – 6.6% revenue growth, 9.7% EPS growth – but given the stock’s run-up the last three months, if the company falls short of those estimates – or if guidance disappoints – shares could get knocked back, at least temporarily. You can buy before the report, but new positions should be on the small side until we know the results this Wednesday.

Current Recommendations

Changes Since Last Week:
Alexandria Real Estate Equities, Inc. (ARE) Moves from Buy to Hold

No sells today, so we are now up to 28 stocks in our Stock of the Week portfolio. That’s a LOT. Going forward, I’ll likely have to keep our existing positions on a short leash, and may have to start giving quicker hooks – especially since the few that are stuck in the mud or mired in mini-slumps stand out like a sore thumb in a portfolio that features more than a handful of stocks hitting 52-week or all-time highs – and two of which have now doubled in the last year!

Alexandria Real Estate Equities (ARE) gets a stay of execution this week, merely getting downgraded to Hold, but will need to prove itself in the coming week on the heels of an uninspiring earnings report. Most of our stocks are in far less precarious positions. Here’s what’s happening with all of them.

Updates

10x Genomics (TXG), originally recommended by Carl Delfeld in his Cabot Explorer advisory, keeps hovering around 43 ahead of earnings next week (February 15). There’s been no news, but we’ll keep hanging on to it in the hopes that earnings results provide a boost. Analysts are looking for 16.6% revenue growth but widening profit losses ($-0.36 per share). HOLD

Alexandria Real Estate Equities, Inc. (ARE), originally recommended by Tom Hutchinson in the Safe Income Tier of his Cabot Dividend Investor advisory, had a rough week after reporting underwhelming earnings. Namely, funds from operations (FFO) came in a penny shy of expectations, at $2.28 per share. Overall, the company reported a loss of $91.9 million, or 54 cents per share. Revenue, however, beat forecasts. The stock tumbled from 126 to 118, its lowest point in nearly two months. Shares have dipped below their 50-day moving average, though remain well above their 200-day line. For that reason – and given how disappointing the earnings were, let’s downgrade to Hold and see how it behaves this week. MOVE FROM BUY TO HOLD

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, keeps chopping around in the 19-to-20 range. With holiday shopping season now more than a month in the rear-view mirror, there might not be another catalyst until earnings are out in late February. So let’s just be patient with this one, sitting on our 17%, three-month gain and biding our time until a potential break higher. If you haven’t bought yet, this looks like a solid entry point. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, came crashing back to support in the 10.7 range after touching multi-month highs around 11.12 a week ago. There was no news. We still have a modest gain on this U.K.-based life insurance and investment management company; shares remain in their two-month range, and, as Bruce notes, “On a combined basis, the dividend and buybacks offer more than a 10% ‘shareholder yield’ to investors.” With 30% upside to Bruce’s 14 price target, we’ll keep it at Buy. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, coughed up much of its post-earnings gains, falling from 127 to 121. Still, the stock remains above its January lows (117) and is up nearly 20% in the last three months, reflecting its status as a “Bull Market Stock” (Mike’s term) that frequently benefits from – and outperforms – bull markets. Seeing as we’re still very much in a bull market, there’s no cause for concern. The latest dip, in fact, looks like an ideal buying opportunity for those who aren’t already in. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, bounced back nicely after a mini-dip, though is still shy of its late-January highs. Earnings aren’t due out for another month. Broadcom is one of many big tech companies getting a boost from its artificial intelligence exposure – and it pays a dividend (1.72% yield) too! BUY

Cisco Systems, Inc. (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Value Investor, had a bad week, dipping from 52 to 49. However, shares have 33% upside to Bruce’s 66 price target, and earnings are due out February 14, which could turn the tide. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, pulled back from 46 to 45 after a big, earnings-induced run-up the week before. The earnings were encouraging, as Bruce wrote in his latest update: “On Thursday, January 25, Comcast reported an encouraging quarter, with results that showed steady or incremental improvement from a year ago and that were generally in line or above estimates. Guidance is for essentially more of the same: incremental pricing that offsets customer losses, with disciplined capital spending that preserves strong free cash flow. Comcast increased its share buyback authorization to $15 billion (about 8% of the current market cap) and raised its dividend by 7%. All-in, Comcast continues to navigate its competitive environment well while rewarding patient shareholders with cash returns. As the shares jumped to our price target, we are reviewing our rating.

“In Connectivity & Platforms (broadband, video, wireless), revenues were flat as 4% higher domestic pricing offset the recurring downtick in the number of customers. Cash operating profits rose 3%.

“In Content & Experiences (NBC, Peacock, Telemundo, Universal Pictures, Universal theme parks, Sky Studios), revenues rose 6% as Theme Parks revenues surged 12%. Adjusted EBITDA rose 2%, as record-high Theme Parks profits and a surge in Studio profits – from their highly successful movie slate – were nearly offset by a slump in Media profits due to falling advertising revenues.

“Free cash flow was strong at $1.7 billion. The quarter caps another healthy year for Comcast, and 2024 is likely to bring more of the same – a grind-forward in sales, earnings and cash flow. Debt remains very reasonable and will fall with the anticipated Hulu proceeds.

“The risk is that Comcast’s high-functioning algorithm gets disrupted by competition or other headwinds.

“In the quarter, revenues rose 2% and were 3% above estimates. Adjusted earnings of $0.84/share increased 2% and were 6% above estimates. Adjusted EBITDA of $8.0 billion was flat compared to a year ago and fell 3% below estimates.” BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, continues to hover around all-time highs just above 300. In his latest update, Mike wrote, “CrowdStrike (CRWD) continues to battle with round-number resistance near 300. That said, it’s also refused to pull in much and remains well above its moving averages, so we’re simply holding on for now. One simple but interesting note from an analyst this week: In terms of revenues, CrowdStrike is just 41% the size of peer Palo Alto Networks (PANW) and less than 60% of the size of Fortinet (FTNT), and that says nothing about many pure-legacy players, so the firm should have years of strong growth ahead if management pulls the right levers. We’re not complacent here, but we have a modest-sized position that still acts well—we’ll stay on Buy a Half, but we think new buyers should be looking to enter on weakness.” Even with an 82% gain in five months, we’ll stay on Buy as well. BUY

Dave & Buster’s (PLAY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, added another couple points, rising as high as 55 before meeting overhead resistance and pulling back this morning. There’s been no news. We now have a slight gain on this retail turnaround story. You can buy it right here. BUY

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, is hitting new 52-week highs! In his latest update, Mike wrote, “DraftKings (DKNG) is toying with new price highs, which makes for an impressive comeback from its sharp December/early January retreat; the news that it’s likely to team up with Barstool helped the cause. Interestingly, the parent of FanDuel, the firm’s chief competitor, recently went public (FLUT), but it hasn’t seemed to have any effect on DKNG one way or the other. Earnings are due February 15, which will obviously be important to see how the ESPN launch last fall affected marketing spend (which recently was actually falling despite higher monetization). Back to the stock, it acts well, though the relative performance (RP) line is still laggy near term. If you don’t own any and want to nibble, we wouldn’t argue with that.” BUY

Dynatrace (DT), originally recommended by Tyler Laundon in Cabot Early Opportunities, also touched new 52-week highs last Friday, though it’s pulling back in early trade today. The company released new AI-driven data observability capabilities for its analytics and automation platform. I’m not entirely sure what that means, but it further enhances Dynatrace’s growing list of data science and business analytics offerings. The bigger potential catalyst is this Thursday’s (February 8) earnings report. Analysts expect 12% EPS growth. BUY

Elastic N.V. (ESTC), originally recommended by Tyler Laundon in Cabot Early Opportunities, keeps flirting with new highs and has been in a range between 117 and 124 the last two weeks. In his latest update, Mike Cintolo (who also recommends the stock to his Cabot Growth Investor audience) wrote, “Elastic (ESTC) has been volatile with most growth stocks in the past couple of weeks, but also like most names, remains fine overall, as the 50-day line (now at 108 and rising) catches up. A drop below that line might have us going to Hold (especially if it coincides with a growth stock selling wave), while a dip below the January low near 103 would be more of a red flag—but right here, this two-week rest appears normal, and the prospects for the firm’s search platform (for observability, security and, soon, AI) are big.” BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, has soared to new all-time highs above 700! After holding for all of January, LLY shares have started off February with a bang, up 9% already including a 5% run-up so far today. Earnings aren’t due out until tomorrow (Tuesday), but it’s likely Wall Street already knows the results are good given the sudden buying spree. This stock has now doubled in the 11 months since we added it to the Stock of the Week portfolio! What to do now? If you bought even in the first few months after our March 2023 recommendation, and especially if you haven’t already done so, I suggest you sell a quarter to a third of your remaining position to book profits with the stock at such elevated heights, especially ahead of earnings tomorrow. If you haven’t yet bought, I’d keep positions small, and preferably wait until after tomorrow’s report. But with the wind at its back and the weight-loss drug boom perhaps even a bigger long-term catalyst than expected, we’ll stay on Buy. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, closed at new 52-week highs last Friday but is down sharply today. All told, shares of this leading U.S. cannabis company are about right where they were a week ago. The entire cannabis sector is in a bit of a holding pattern until the Drug Enforcement Administration (DEA) renders a decision on rescheduling cannabis to a Schedule III from a Schedule I drug. A letter was sent last week from 12 Democratic U.S. Senators, including Elizabeth Warren and John Fetterman, urging the DEA to do just that. We’ll see if that speeds things up at all. BUY

Intel Corporation (INTC), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, seems to be holding support in the upper 42s after falling more than 10% on earnings. Here’s what Tom had to say about those results: “Intel reported earnings last Friday that laid a big fat egg. Wall Street hated it, and the stock price has declined about 13% since the report. The chipmaker actually exceeded expectations for both earnings and revenue in the fourth quarter, but it was next quarter’s guidance that repulsed investors. The company guided for earnings and revenues substantially less than what had been expected. Apparently, the bounty from the new chips and the foundry business won’t come as soon as optimistic investors had hoped. The future is still bright. There are great days ahead. But the recent spate of good news had investors hungry for more the same. They didn’t get it.” The miss and subsequent mini-implosion prompted us to downgrade INTC to Hold last week. With the stock mostly holding support since, we’ll keep it right there for now. But a dip below 46 may result in a quick hook. Stay tuned. HOLD

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, has been on a rollercoaster ride since reporting earnings on January 30. At first, Wall Street seemed to hate the results, but the stock has fully recovered all its losses from the ensuing mini-dip. The report wasn’t bad: revenue beat estimates by 1.8%, while EPS beat by 5.8%. The 17.6% year-over-year increase in revenue was solid. However, guidance for the company’s current (fiscal ’24 third quarter) was modest, roughly in line with estimates, which given Microsoft’s growth of late, amounted to a mild disappointment, at least temporarily. The company’s Azure cloud computing segment continues to be a big growth driver, up 30% year over year, and AI was a significant part of that, with 53,000 Azure AI customers, up a third from the same quarter a year ago. So, Microsoft remains an AI leader, which is reason enough to believe in the stock’s long-term outlook. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, is, like its weight-loss drug partner-in-crime LLY, hitting new all-time highs! In Novo’s case, the catalyst is its $11.5 billion acquisition of drug manufacturer Catalent, with the intent of boosting its Wegovy supply. That buyout comes on the heels of last week’s stellar earnings report, in which the company reported full-year 2023 revenue growth of 36% while profits jumped 44%. Sales are expected to slip some this year, but not much: The company guided for a range of 18% to 26% revenue growth in 2024. 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, held its highs near 57, an impressive feat given that the stock has nearly doubled in the last six months. Here’s what Mike had to say about it: “Nutanix’s (NTNX) set a new closing high today, so it’s clear the buyers are firmly in control. The combination of some super-bullish analyst commentary in the middle of January (it appears Nutanix is taking a lot of share from VMware in the wake of that firm being taken over by Broadcom) and lingering M&A rumors are keeping buyers interested. We sold one-third of our shares and are comfortable sitting tight with the rest.” With gains north of 50% in just four months, we’ll keep it at Buy, but as I wrote recently, it’s a good time to book profits on a few shares if you got in early after our early-October recommendation. BUY

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, also poked its head to new 52-week highs before pulling back slightly. Shares of the social media company are likely in a holding pattern until the company reports earnings this Thursday, February 8. Analysts expect 12.7% revenue growth but 76% EPS growth. BUY

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, stayed in its recent 102-to-109 range even after reporting earnings last week. Mike has the details on those: “Business remains great at PulteGroup (PHM), which reported a solid Q4 this week—while sales were off 15% and earnings fell 10% from a year ago, that was a smidge better than expected and down from very elevated levels. But more important is the fact that the future looks bright, with net new orders leaping 57% and with the top brass saying some positive things given the drop in mortgage rates. Analysts have moved up their earnings estimates to $12 per share for 2024, and even that could prove conservative if rates continue to move lower (the 10-year Treasury yield is off 30 basis points this week!). Shares have been volatile of late, but to this point, it’s only three points or so below new closing highs.” BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, dipped only slightly after hitting new highs last week. For the most part, this large-cap software stock has been incredibly reliable. And its recent earnings were good: Q4 earnings and revenue topped estimates, with EPS up 31% year over year while revenues improved by 26%. Subscription revenue was up 27% from the same quarter a year ago. Most encouragingly, ServiceNow’s current remaining performance obligations, or CRPO, came in above expectations. CRPO rose 24% to $8.6 billion. Analysts had projected CRPO of $8.37 billion. CRPO bookings are an aggregate of deferred revenue and order backlog and serve as a sales growth metric. The company appears to be clicking on all cylinders right now, and we continue to reap the benefits. BUY

Soleno Therapeutics (SLNO), originally recommended by Tyler Laundon in Cabot Early Opportunities, had a very good debut week, advancing 6% on 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. On January 22, Stifel initiated the stock at buy with a price target of 63. It currently trades at 49 a share.

SLNO was barely a five-dollar stock last fall. But the DCCR trial results announced on September 26 sent it up to 30 the next day. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has not recovered from another disappointing earnings report, hovering in the low 180s for most of the two weeks since the report came out. For a day or two, it appeared TSLA shares might be getting a bump, but a target price cut from Piper Sandler (to 225 from 295) sent the stock tumbling back down to its lows today, as did a report that German software firm SAP will no longer source company cars from Tesla due its delay in deliveries and ongoing price cuts. In the grand scheme, that’s little more than a scratch on Tesla’s overall business, but Piper Sandler’s reduced outlook pointed toward the company’s more modest growth – it estimates a mere 7% growth in deliveries this year – which is a more meaningful concern. Still, the stock hasn’t been this low-priced in nine months, and its entire history is dotted with furious comebacks every time Wall Street starts to write it off. I’ll keep it at Hold until the bleeding stops, but don’t be surprised if bargain hunters give it a boost in the coming weeks, despite all the negative headlines. HOLD

Tripadvisor (TRIP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has fully recovered from its modest dip in the first half of January and is back up near its late-December highs. This is a play on the ongoing travel boom in a post-Covid world. While up sharply in recent months, shares trade at just a fraction of their 2014 highs above 110. Earnings are due out February 14. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, was up yet again this week, touching new highs above 69 today, ahead of earnings on Wednesday. It is now our second double in the last year – we added the stock to our portfolio at 34 a share on February 14, 2023! In his latest update, Mike wrote, “Uber (UBER) has earnings next Wednesday, so if you don’t own any, we advise keeping it small this close to the report. That said, the stock continues to look very strong, with about the only negative being a lack of upside volume during its gains so far this year. We’ll take it as it comes, but we have no new thoughts here—UBER acts like a liquid leader, though like many names, it’s had a big run so we’ll see how the stock reacts to its report.” BUY

Varonis (VRNS), originally recommended by Tyler Laundon in Cabot Early Opportunities, keeps holding right around 45. Earnings are due out after the market close today so we’ll see if that can push shares above recent highs near 47. Wait on new buys until after today’s report. 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 12, 2024.

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