Cabot Stock of the Week Issue: January 2, 2024

Happy New Year! I hope you all enjoyed a restful, festive holiday and feel reinvigorated for a new year of investing, and hopefully profiting. Our current crop of stocks is thriving, up an average of 29% last year thanks in large part to the furious November/December market rally that turned 2023 from a strong year for just a handful of mega-cap tech stocks to a genuine bull market that’s being felt across many sectors.

Will the rally continue into 2024? Many indicators suggest so.

Interest rates have almost surely peaked, and rate cuts are on the Fed’s agenda this year. Inflation is fading. Recession fears have all but fizzled, with a strong holiday shopping season providing the latest evidence. And while geopolitical turmoil in Gaza and Ukraine rage on, they aren’t new and thus are priced into the market as long as both conflicts remain contained. Of course, there are always unexpected twists in any calendar year – remember the run of bank crashes last March? So, 2024 will surely not be smooth sailing, especially not with a presidential election looming.

But the trend is most definitely up, stocks are flirting with all-time highs, and the U.S. economy is growing. That said, a few sectors have become a bit overcooked, at least in the short term. Thus, we will start the year by searching for bargains. And today, that brings me back to a sector that was a blind spot for our portfolio in 2023: cannabis. Several times, I added exposure to the up-and-down cannabis sector last year; each attempt failed. My biggest mistake was attempting to buy into rare moments of strength for the sector – like when the Department of Health and Human Services recommended rescheduling cannabis from a Schedule I to a Schedule III drug and cannabis stocks soared. I added a cannabis ETF to the portfolio too late, and the mini-rally fizzled.

This time, there have been no recent catalysts for the cannabis sector – but there remain plenty on the horizon, perhaps immediate horizon now that Congress is back in session as of tomorrow. So, I’m adding the largest portfolio holding from our Cabot Cannabis Investor advisory, where Chief Analyst Michael Brush has been patiently biding his time for the next big cannabis rally, outperforming the benchmark cannabis index along the way.

Here it is, with Michael’s latest thoughts on both the company and the sector as a whole.

Green Thumb Industries Inc. (GTBIF)

Part of my core thesis for being bullish on cannabis stocks is that there continues to be tremendous cultural momentum toward cannabis reform around the world. I’m convinced cannabis stocks will not remain ignored forever.

We see evidence of this powerful cultural momentum in the changes in laws to legalize cannabis, big tobacco investments in the space, robust cannabis sales growth in states that legalize, increased cultural acceptance in the form of relaxed drug testing standards in sports leagues and the workplace, and poll results that show a growing majority of people support legalization regardless of age and party affiliation.

These trends tell us cannabis stocks are a strong contrarian buy that will turn very profitable for patient investors with a medium-term horizon. The sector is so volatile, it is easy to get shaken out of names by heightened emotional reaction to drawdowns. So, it is important to catalog evidence of this cultural momentum. Among the most recent evidence:

* President Joe Biden on December 22 expanded his cannabis pardon initiative to people arrested for possession on federal property.

The news put a bid under cannabis stocks, driving them higher. That’s because Biden referred to the country’s “failed approach” to cannabis, in announcing the news. His comments reminded skittish cannabis investors that he is serious about major reforms like rescheduling under the Controlled Substances Act.

“Criminal records for marijuana use and possession have imposed needless barriers to employment, housing, and educational opportunities,” Biden said in a statement. “Too many lives have been upended because of our failed approach to marijuana. It’s time that we right these wrongs.

“Just as no one should be in a federal prison solely due to the use or possession of marijuana, no one should be in a local jail or state prison for that reason, either,” the president continued. “That’s why I continue to urge governors to do the same with regard to state offenses and applaud those who have since taken action.”

On rescheduling, the Department of Justice is now considering a recommendation from the Department of Health and Human Services to reschedule cannabis to Schedule III from Schedule I, based on a Biden initiative to achieve reform. The next step in this process should be a proposed rule on rescheduling from the Drug Enforcement Agency possibly by April, says one industry insider.

* A majority of sports doctors think cannabis should be removed from the World Anti-Doping Agency’s (WADA) list of prohibited substances. The study found that 59% of 333 doctors surveyed support the change. A majority of the doctors also support legalizing cannabis for recreational and medical use.

* Cannabis is now a “formidable competitor” to alcohol, and it is going to keep gaining share as more states legalize, say researchers at the brokerage TD Cowen. The report says legal cannabis sales should hit $37 billion a year in 2027 as more state markets come online.

The brokerage says cannabis sales will come in at $29 billion in 2023. That’s 11% of alcohol sales, up from 4% five years ago. In Canada, cannabis sales are 20% of alcohol sales. Cannabis will gain 18 million users over the next five years (defined as people who report use in the past month) and alcohol will lose two million users, predicts the TD Cowen report, called “Cannabis Beats Booze.” A Gallup survey found Americans think cannabis is less harmful than alcohol, cigarettes and tobacco vapes. Cannabis sales surpass alcohol sales in Michigan, Illinois, Colorado, Arizona and Washington.

With all those potential catalysts looming, my top cannabis stock recommendation is Green Thumb Industries. Green Thumb was the third-largest cannabis company in the U.S. last year, with operations in 15 markets. It has been the most profitable multistate operator of all the big ones – a sign of good management.

Green Thumb branded cannabis products include &Shine, Beboe, Dogwalkers, Doctor Solomon’s, Good Green, incredibles and RYTHM. The company operates a chain of national retail cannabis stores called RISE. It has 84 retail stores and 18 manufacturing facilities in 15 U.S. markets. Green Thumb opened another RISE dispensary in Florida, in Port Orange. This is the company’s 14th location in Florida and 90th nationwide. The cannabis company is positioning ahead of potential recreational-use legalization in Florida over the next two years.

Green Thumb is expanding its medical footprint in Florida through a lease agreement with the convenience store chain Circle K. This could be a big deal, since the Circle K chain has 600 locations in Florida. Ongoing market developments in Illinois and New Jersey could be strong catalysts for Green Thumb Industries.

Founder Ben Kovler is chairman and CEO. Research shows that founder-run companies often outperform. Kovler has a 26% stake in the business and holds nearly 59% of voting power. Green Thumb trades at a price to sales ratio of 2.42.

Current Recommendations

Changes Since Last Week:
Eli Lilly (LLY) Moves from Hold to Buy

No major changes today other than to upgrade Eli Lilly (LLY) back to Buy now that it’s again showing signs of life. Most of our stocks held up quite well over the holidays, with a few of them posting impressive gains. With the addition of GTBIF, we now have a new high of 25 stocks in the portfolio. My inclination is to cap it there – 25 is a lot. So, we may have to sell something next week. But that will depend on our stocks – if we have to go to 26, so be it. It’s better than arbitrarily selling out of a perfectly well-behaved stock. We’ll see what this holiday-shortened week brings.

Here’s what’s currently happening with all our stocks as we enter a new year.

Updates

10x Genomics (TXG), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has added another point since we last wrote, though it was down sharply last Friday and again this morning. But we still have a 12% gain on the stock in less than a month. Nothing troubling is knocking the stock back – there’s been no news, so this looks like normal consolidation after a nice run-up. So you could buy this dip if you haven’t already bought, or could add to an existing position. 10x is a leader in the emerging field of “spatial biology,” a cutting-edge life science for making new discoveries about human health and disease. 10x helps researchers look at the roots of biology. The stock was up more than 53% in 2023. BUY

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is up to 21 from 20 since we last wrote and just keeps chugging along. There’s been no news, so the clothing retailer is likely feeding off the good holiday shopping vibes, as U.S. shoppers spent 3.1% more this holiday season (beginning of November through Christmas Eve) than they did a year ago. The current mini-dip looks buyable. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, topped 11 per share for the first time in almost a year. There was no news. Bruce still thinks this U.K.-based life insurance and investment management firm will get to 14 a share – 27% higher than its current price. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is up another 5% since our last issue, and we now have a 24% gain on it in five months. Here’s what Mike had to say about the stock in a recent issue of Cabot Growth Investor (where it’s on his Watch List): “There are more and more signs that the market’s late-year rally might be more than that—possibly the start of a real, sustained bull phase following two years mostly in the wilderness. If so, it’s about as sure a bet as they come that Bull Market stocks (those whose business benefits from higher asset prices) like Blackstone … will thrive. (The company has) good-sized private equity operations, as well as plenty of assets in real estate. … Assets have remained solid, but growth has slowed to mid-single-digit rates as asset prices struggled and sentiment waned (making it harder to raise money)—but if the Fed really is off the market’s back and money becomes easier next year and the economy doesn’t implode, that should all change, which will lead not just to higher earnings but bigger payouts and share buybacks as well. There’s not much sexiness to the (story), but it’s a straightforward idea that has worked very well during prior sustained uptrends, and we see no reason for that to change if the bulls really have taken control.” BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, is down about 2.5% since our last issue, which arrived just as the stock was hitting new all-time highs. No matter. A mild pullback is both healthy and buyable after a year in which the stock basically doubled. The performance has been strong enough to attract the attention of Mike Cintolo, who wrote the following about Broadcom in his latest update: “We know $1,000-plus stocks aren’t anyone’s favorites out there, but we usually don’t put a ton of emphasis on a stock price (we’ve seen tons of higher-priced names do just fine; institutions, which are the ones that drive stocks, don’t care about the price), and there’s one lesson we learned long ago: Never underestimate a super-liquid, big-cap stock that breaks out on out-of-this-world volume … which is just what we’ve seen from Broadcom of late. The firm has its hands in most chip (about 60% of revenue) and tech infrastructure (40%) cookie jars that play into just about every theme out there (networking, servers and storage connectivity, broadband, wireless, industrial, automotive, etc.) thanks to both in-house development and a slew of good-sized acquisitions over the years, with the latest being VMware (which just closed in November). As you’d expect, then, this is a giant operation—in the fiscal year just ended in October, Broadcom cranked out $35.8 billion in revenue, up just 8% from the prior year, as many of its cyclical chip end markets struggled, and the coming year should see more single-digit growth. However, the stock has gone bananas for a couple of reasons. First, this has always been a very, very profitable company; pre-tax profit margins in the latest quarter were 59% while free cash flow made up nearly half of revenues for the entire year! And that’s expected to continue going ahead—management sees EBITDA up nearly 30% in the coming year despite the slow revenue gain as VMware helps and other profitable areas kick into gear. Second, while many firms talk a good AI game, it looks like Broadcom is seeing real results already: In its chip business, nearly 20% of its chip revenue last quarter was at least somewhat related to generative AI (including its AI accelerators, where it’s a second place firm to Nvidia), and the top brass sees that leaping to 25% for the current fiscal year as a whole (and likely toward 30% as it exits the year). All in all, you have a very well-situated company with a strong history of topping estimates that’s playing well in some new, big growth areas, with strong cash flow growth likely for at least the next couple of years—all of which looks like catnip for institutional investors. AVGO exploded higher during the initial AI boomlet in the spring, and after leveling out for a few months, has seen overwhelming buying of late, including its heaviest weekly volume since 2018. Yes, it’s higher priced, but our guess is AVGO will do well going ahead.” BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has bounced back nicely since we moved it to Hold in our last issue, bouncing off support at 52 to get back to 55 as of this writing. Coming off a year in which it managed to top Tesla in global electric vehicle sales, it’s only a matter of time before the stock price catches up with the company’s incredible performance. As the narrative of China’s slow-moving economy fades, and investors notice that Chinese stocks have become woefully undervalued after a down year, I’m convinced BYDDY shares will play catch-up quick. But I’m going to keep the stock at Hold until it proves it; a move back above its 200-day moving average (61) would do the trick. HOLD

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, remains in its patented 41-44 range, where it’s been for the last two months, despite threatening to push to 45 just before Christmas. Eventually, a breakout will come – perhaps before or after the company reports earnings on January 25. With three straight quarters of double-digit earnings beats, there’s a chance the breakout will be to the high side. We’ll see. In the meantime, the stock remains a Buy coming off a solid (+25%, plus the dividend) if unspectacular year. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, has held near its highs the last couple weeks, with little movement. In his latest update, Mike wrote, “If we do see some reasonable weakness in growth stocks in early January, we could take advantage of it to average up in CRWD, which has acted about as smoothly as we could have hoped, with a tight area just south of 260 during the past couple of weeks. Interestingly, one thing the CEO said last week was that new regulatory requirements, which require firms to disclose meaningful cybersecurity breaches, are helping business, both in terms of hiring CrowdStrike to assess any damage—and, of course, possibly to sign up those companies for its prevention offerings after the fact. As for the general environment, some investment houses see cybersecurity budgets booming 25% to 30% next year, and there’s no reason this firm won’t grab more than its fair share. We’ll stay on Buy a Half but continue to look for a higher-odds point to average up.” Good advice. I suggest you do the same. BUY

Dave & Buster’s (PLAY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is off to a great start for us, advancing 9% since we added it to the portfolio in our December 18 issue. There’s been no news other than the retirement of company CEO Michael Quartieri. Mike likes the stock as a turnaround retail play, as the casual restaurant/arcade hybrid chain looks to add 550 new locations in the coming years and to increase the store base by 16% in the next couple years. Also, it “sees cumulative free cash flow during the next five years of $1.7 billion (90% of the current market cap) even if all current locations don’t grow at all,” according to Mike. Meanwhile, the stock trades well below its 2017 peak around 69, yet has some serious momentum, up 56% in the last two months! Trading at a mere 12.5 times forward earnings, PLAY is a perfect blend of value and growth. BUY

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, has held mostly firm around 35 since we last wrote. In his latest update, Mike wrote, “DKNG remains a near-term laggard, with its very promising breakout action in early November hitting a road bump this month, likely due to uncertainty surrounding competition (ESPN in particular). That said, we remain optimistic as the potential hasn’t changed—the firm thinks it will see EBITDA lift to north of $2 billion in a few years, and that’s just in the states that are currently legalized and assumes no market share gains, with theoretical upside to $6 billion if the U.S. fully legalized online sports betting. If the stock really cracks the 50-day line, we’ll probably sell a chunk of our shares to respect the weakness, but at this point, we’re holding on and looking for signs that the overall uptrend is resuming.” We’ll hang on as well. The stock looks buyable as long as it doesn’t dip below 34. BUY

Dynatrace (DT), originally recommended by Tyler Laundon in Cabot Early Opportunities, has fallen sharply in the last few trading days, dipping from 55 to 52. There’s been no news, so it’s possible this is just a normal pullback after a very strong November and December. Shares are still well north of their moving averages, so we’ll keep them at Buy. But this retreat is steep enough that it’s worth keeping an eye on in the coming days. BUY

Elastic N.V. (ESTC), originally recommended by Tyler Laundon in Cabot Early Opportunities, is down sharply along with the market this morning after mostly holding its gains in the last couple weeks of December. It doesn’t appear anything is actually causing today’s selloff. In his latest issue, Mike wrote, “ESTC has been marking time during the past couple of weeks, which is fine by us—trading tightly after its gigantic post-earnings move is a good thing and is allowing the moving averages to catch up (25-day is nearing 105). While the valuation is up there, we like the fact that Elastic has a great core business for data search (applicable for things like security and observability), and management made it a point to say it’s having tons of conversations and uptake of some newer AI-related offerings, as its platform is perfectly suited to be the search engine that many AI systems are built on. If the stock falls apart, we’ll cut our loss and move on, but right now we’re definitely thinking optimistically.” I wouldn’t call one day of selling “falling apart,” but it’s worth keeping an eye on after today. For now, we’ll keep it at Buy. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was one of THE stories of 2023, along with Novo Nordisk (see below), thanks to its breakthrough weight-loss drug, Mounjaro. The stock was up 60% last year. Trading about 5.5% below its early-November highs, however, this looks like a nice entry point given that we’re still in the early stages of this new weight-loss pill boom. With the stock showing signs of life after a two-month holding period, let’s move it back to Buy. MOVE FROM HOLD TO BUY

Intel Corporation (INTC), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is up from 45 to 48 since we last wrote, breaking above 50 at one point last week. There’s been no news. The chip-making giant has been benefitting from the artificial intelligence boom, rising more than 82% in the last year, and yet still trades well off its highs. With earnings per share expected to double in 2024, it’s not unreasonable to expect another strong year from INTC. You can buy on today’s dip. BUY

Krystal Biotech (KRYS), originally recommended by Tyler Laundon in Cabot Early Opportunities, was upgraded to Buy in our last issue, and the stock has rewarded us with a 9% gain since! There’s been no news; rather, the small-cap biotech appears to be riding the wave of the recent market rally. The fact that it’s up today while most other growth stocks are down seems like a good sign. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, keeps holding steady in the 365-375 range. Earnings are due out later this month, which could prompt some movement. Regardless, this so-called Magnificent Seven stock is a must-have for any portfolio given its leadership position in the AI boom thanks to ChatGPT, which is essentially what catapulted artificial intelligence into the mainstream more than a year ago. Thus, even coming off a very good year (+54%), MSFT is a long-term buy. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, has sprung back to life, even more so than LLY, as shares are up 6.5% since mid-December and are closing in on their late-November highs above 105. What I wrote about Eli Lilly applies to Novo Nordisk, the Danish maker of fellow weight-loss blockbuster drugs Ozempic and Wegovy: The weight-loss pill market is just getting started, and while the romance phase for these two stocks has faded, the reality phase is just beginning. And with 20%-plus revenue and earnings growth expected both last year and this year, Novo’s reality is good enough to keep driving the stock higher in 2024. BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is down about a point, from 47 to 46, since we last wrote. In his latest update, Mike wrote, “NTNX acts a bit like CRWD, extremely smooth to this point, with basically zero wobbles during the past few weeks (it’s up eight weeks in a row, a clear sign of persistent buying). That’s going to change at some point, of course, but the stock acts like a fresh leader after years on the outs (the all-time high for the stock was back in 2018)—and that makes sense, given the firm’s move to a subscription model and an emphasis on its IT platform that can handle a big client’s entire IT stack, even across multiple cloud environments. The bottom line here is that Nutanix’s offering saves customers plenty of money and increases ease of use, so recurring revenue and cash flow should continue to kite higher in the quarters to come. We’ll stay on Buy, though as with many names, try to buy on dips of a point or two.” Today’s dip (4%) looks like a golden opportunity. BUY

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is also down a point since we last wrote, almost all of which is coming today as most growth titles sell off to begin the new year. Nothing to worry about, especially not coming off a year in which the stock advanced 50%. Revenues are expected to accelerate in 2024 (from an estimated 9% in 2023 to 16% next year), and the stock trades at less than half its 2021 peak. Two recent analyst upgrades indicate that Wall Street sees the upside too with this still-popular social media company. BUY

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, is exactly where it was when we last wrote, at 102. That’s a good thing – it’s just off of all-time highs at 104. In his latest update, Mike wrote, “It’s pretty well known at this point that the trend in interest rates (and, hence, mortgage rates) has turned down—but what’s not as talked about is the ‘damage’ also being done to the long-term uptrend in rates: In fact, Treasury rates across the board (two-year, five-year, 10-year) are now clearly below their 200-day lines and all are below where they were six months ago, too. We’re not going to predict what happens from here, but there’s little doubt that the move should charge up an already-resilient housing market (after a 25%-ish dip from the peak, the number of housing starts bottomed out for months and is now perking up; November’s figure was up 9% from the year before). That may mean that Pulte’s buoyant business could strengthen and that earnings estimates (analysts see earnings next year of $11.31 per share, down 2% from this year) could prove conservative. (Earlier this year, analysts saw Pulte’s earnings coming in south of $8 per share, just to show you how fast the numbers can move.) Obviously, a backup in rates could pull down PHM and other homebuilders, but the main trend is up. Hold on if you own some, and if you don’t, you can start a position here or (preferably) on dips.” BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, is down about 3% since we last wrote and a little over 4% since hitting new all-time highs in mid-December. There’s been no news, so this pullback is likely normal consolidation after a big run-up. We still have a 23% gain on this large-cap software stock in just seven months. Keeping at Buy. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is coming off a down year for the company and a great year for the stock. Shares of TSLA more than doubled in 2023 after a rough 2022, though they still trade about 40% below their 2021 highs. To get back there, the company will need to reverse some of the bad vibes from weak third-quarter earnings, repeated price cuts on its top models eating away at its long-admired profit margins, and CEO Elon Musk’s ever-increasing lightning rod status, mostly due to comments he’s made and things he’s done that have nothing to do with Tesla. The upcoming Q4 earnings report, due out later this month, is key. Early indications are good: This morning the company reported a record 485,000 deliveries for the quarter, enabling it to hit its goal of 1.8 million deliveries in 2023, up 38% from 2022. So it’s possible the third-quarter earnings miss was an aberration. We will know more soon. It’s unlikely TSLA stock can match last year’s double. But another year of double-digit percentage gains seems likely as long as the company keeps growing as expected. That said, I will keep the stock at Hold until it breaks above the 200-day line (248). HOLD

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, was our second-best performing stock in 2023 after TSLA, but shares are down from 62 to 59 since our last issue. In his latest update, Mike wrote, “If a stock runs higher before inclusion into a major index like the S&P 500 (due to investors front-running the huge index funds that have to get in), you’ll usually see some retrenchment, and we’re still thinking that’s possible with UBER—but so far, the stock’s resilience and tightness despite its big advance has been impressive. The top brass has been mostly quiet the past few weeks, but it’s clear that big investors think that the core businesses here should see strong (and if the economy picks up, accelerating) bookings while some newer ventures (like the advertising business, which could bring in $1 billion in 2024) lift off and EBITDA and free cash flow power ahead. We think higher prices are likely down the road, though if you’re starting a position today, you might consider keeping it small and/or looking for dips of two or three points.” That’s precisely what’s happening to the stock today. You could treat today’s 4% pullback as a buying opportunity. BUY

Varonis (VRNS), originally recommended by Tyler Laundon in Cabot Early Opportunities, is down from 45 to 44 since we last wrote. There’s been no news for this mid-cap cybersecurity company. Varonis sells security software that’s used to protect enterprise data, from sensitive files and emails to confidential customer and patient records, financial data, strategic and product development plans and so much more. We have an 11% gain on the stock in just over a month. BUY

The next Cabot Stock of the Week issue will be published on January 8, 2024.