Cabot Stock of the Week Issue: January 29, 2024

Last week was a quiet one for the market, with little change in the indexes after they finally reached new highs. This week shouldn’t be so quiet – not with 40% of the S&P 500 reporting fourth-quarter earnings, the latest Fed update on interest rates and accompanying Jerome Powell press conference, and a fresh batch of jobs numbers coming out this Friday. Whether those events will slow or accelerate the market’s three-month rally is anyone’s guess. But what’s inarguable in the here and now is that the market is healthy.

So, with that in mind, we take another big swing today in the form of a small-cap biotech stock that got an exponential bump in September after reporting breakthrough clinical-stage results on a rare disease. Shares have been trending higher ever since, convincing Tyler Laundon to add the stock to his Cabot Early Opportunities portfolio last week. Today, it debuts in the Stock of the Week portfolio.

Here it is, with Tyler’s latest thoughts.

Soleno Therapeutics (SLNO)

Soleno Therapeutics (SLNO) 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).

PWS is a rare, genetic disease that affects 10K to 20K people in the U.S. and about 400K globally. It’s recognized within the first few weeks of life in the U.S.

Affected babies will be “floppy,” with very little muscle tone. As they get older, body fat builds and muscle mass stays very low.

By age seven or eight, hyperphagia is almost always present; that’s an insatiable desire to eat whatever comes by. Pizzas, cat food, cookies, fruit, whatever. It doesn’t matter.

The only way to control hyperphagia is to restrict access to food. So families with affected kids often need to lock cabinets and fridges and avoid restaurants and other public events. Understandably, the kids often develop all sorts of other issues. Their brain says “Eat, eat, eat!” and their parents and the rest of the world say “Stop!”

There are no treatments, though there have been several attempts. But Soleno may have cracked the code with a daily, oral, extended-release tablet of the choline salt of a known drug called diazoxide.

The short version is that DCCR appears to shut down appetite, thereby reducing fat mass, increasing lean body mass and reducing aggressive, threatening and destructive behaviors.

This was shown over a two-to-four-year study where the data really showed benefit when kids went off treatment.

Because of the complexity of the data (it spanned the pandemic), Soleno has been working with the FDA to make sure they look holistically at what DCCR does. Relative to placebo, the data show it did better on all nine dimensions evaluated, with the difference between DCCR and placebo beginning early and widening over time.

All but one of the placebo patients are now back on the drug because it appears to work so well and the need is so great.

Soleno management says this market is so small and advocacy groups and affected patients are so aware of what’s out there (or not) for treatments that parents, pediatricians, psychologists, geneticists, etc. will know the treatment is coming. That means a very engaged potential market.

There are other potential indications where DCCR could work too, but that will come if/after DCCR is approved for PWS.

The team is now working on their NDA for the FDA (which would mark official approval, if granted) with a mid-2024 target for submission. Commercialization plans are in the works. The company has been raising money through secondary offerings and pre-funded warrants ($129 million raised in October) to help fund growth.

This is an exciting biotech story, and while approval of DCCR this year is not a given, the odds are massively tilted in SLNO’s favor. The details of how much it will cost to bring the treatment to market and what the pricing will look like have yet to be ironed out, and there is considerable risk in all of that.

However, for those with a sizeable risk appetite, SLNO’s price action and the business development activities driving the stock should be tempting.

On January 22, Stifel initiated the stock at buy with a price target of 63 (SLNO closed last week near 46). Look for earnings to come out around March 19.

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.

Shares settled down a little in the weeks after but never fell below 20. And since mid-November they’ve been walking higher, recently crossing the 40 level and cruising up into the mid-40s.

With momentum behind biotech stocks (and some M&A) it’s worth taking a stab at SLNO.

Current Recommendations

Changes Since Last Week:
Intel Corp. (INTC) Moves from Buy to Hold
Krystal Biotech (KRYS) Moves from Buy to Sell

We have another sell today, as Krystal Biotech (KRYS) shares have broken down and don’t have an obvious catalyst on the horizon. We’ll get out with a small gain on the stock. Intel (INTC) had a similar breakdown, but in response to a quarter earnings report that was mostly strong, so we’ll hang on to it, but bump it down to a Hold until the selling subsides.

Most of our other stocks (27 of them still, with the addition of SLNO) are acting well, with more than a handful hitting new highs. Here’s what’s happening with all of them as we head into a busy stretch of earnings.

Updates

10x Genomics (TXG), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is about where it was a week ago, at 43. There’s been no news other than that the company will report earnings on February 15. 10x Genomics is a leader in the emerging field of “spatial biology,” a cutting-edge life science for making new discoveries about human health and disease. The company builds tools for scientific research to advance human health. Its instruments, reagents and software allow researchers to examine cells and molecules at a resolution and scale never imagined or experienced before. HOLD

Alexandria Real Estate Equities, Inc. (ARE), originally recommended by Tom Hutchinson in the Safe Income Tier of his Cabot Dividend Investor advisory, was mostly steady ahead of earnings today. We’ll see if the results are good enough to trigger another run-up in the share price after a 40% rally in November and December. Shares are down about 7.5% from their mid-December apex. BUY

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been chopping around since peaking at 21 in late December. The good news is the floor keeps getting higher. With holiday shopping season now 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 18%, 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, closed last Friday at its highest point in nearly a year! There was no news. Shares of this U.K.-based life insurance and investment management services firm still have 26% upside to Bruce’s 24 price target. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is back on the right track, rising 5.5% after beating earnings last week. Earnings improved 4% year over year and beat estimates by 16%. Meanwhile, net profits from asset sales rose 16%. Revenues reached $2.54 billion, edging out analyst estimates of $2.46 billion. The results for the world’s largest private equity firm weren’t entirely rosy: For full-year 2023, its real estate revenues were sliced exactly in half. But there was enough good for the bulls to latch on to, giving shares of this “Bull Market Stock” (Mike’s term) a nice boost. We now have a 20% gain on the stock. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, is down a little over 1% since we last wrote, and really that’s a pittance considering the stock had gained more than 100 points the week prior and had shattered previous record highs. There’s been no obvious catalyst. Rather, the stock seems to be benefitting from the resurgence in AI appetites. The stock is up more than 8% in January on the heels of nearly doubling in 2023. You could buy this mini-dip, just keep new positions small given shares’ current altitude. BUY

Cisco Systems, Inc. (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Value Investor, was up from 51 to 52 in its first week in the portfolio. Shares still have 27% upside to Bruce’s 66 price target. As Bruce wrote last week, “Cisco’s prospects are starting to improve under a relatively new CEO, who is shifting Cisco toward a software and subscription model and is rolling out new products, helped by its strong reputation and entrenched position within its customers’ infrastructure. The company is highly profitable and generates vast cash flow. Its announced deal for Splunk will drain most of its cash hoard but we see this as being replenished relatively quickly.” BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, got a nice bump from earnings after weeks of being stuck at 43. The media giant reported Q4 numbers last Thursday and the results were good: The company beat both top- and bottom-line estimates and raised its dividend by 7%, to $1.24 per share. Net income improved 7.8% year over year while revenue ticked up 2.3%. In addition to the dividend raise, the company approved a $15 billion share repurchase program. While the company is still bleeding broadband subscribers, it lost “only” 34,000 customers in the fourth quarter, far less than the 62,000-customer dip analysts were expecting. But revenue per user is on the rise, and total broadband revenue was up 3.7%. Other parts of its business are thriving: Peacock, its flagship streaming service under the NBCUniversal brand, added 3 million subscribers (huge hat tip to the NFL, especially a Chiefs-Dolphins playoff game), pushing revenues (+57%) above $1 billion for the first time. Theme parks (led by Universal Studios) improved revenues by 11.7%.

At 46, shares are now at their highest point since last August. We’ll see if they can continue to gather momentum in the wake of a solid quarter for the company. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, held its recent gains – an impressive achievement considering shares are up 72% in the last three months. In his latest update, Mike wrote, “CRWD remains a homesick angel, surging more than 50 points since the start-of-January pullback, now challenging round-number resistance around 300. For whatever reason, there seem to be many more cyberattacks going on these days—Microsoft of all firms recently said a state-sponsored organization hacked some emails of senior leaders—and when you combine that with disclosure regulations, it’s almost surely leading to a big bump in business for CrowdStrike, both for initial forensics and, after that, when signing up big outfits for some of its services. That said, CRWD has had a huge run and a lot of good news is out, while shares are extended to the upside. Big picture, that is a sign of strength, but near term, it may mean that some turbulence is dead ahead. Right now, we’ll keep our Buy a Half rating—a controlled pullback for a few sessions could provide an opportunity—but our short-term antennae are up in case the sellers step up.” So far, no pullbacks. We’ll keep our Buy rating as well. BUY

Dave & Buster’s (PLAY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is up from 50 to 52 since our last issue and appears to be recovering nicely from its first-half-of-January dip. 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, tacked on another point and has now recovered basically all of its early-January losses. In his recent update, Mike wrote, “DKNG has been a hard stock to handle, first with its tedious summer and fall drop last year, and then more recently, when it gave back all of its post-breakout gains. The good news, though, is the stock has once again pulled itself away from the cliff’s edge, roaring back to its prior highs on good volume, partially thanks to some positive analyst reports that suggest ESPN’s new venture, while off to a good start, isn’t likely to grab much market share from the leaders like DraftKings and FanDuel. And then there was more good news yesterday, as the company is reportedly likely to tie up with Barstool Sports, which used to be a partner with Penn National before they decided to go in with ESPN. All told, we obviously like the snapback, and if you didn’t own any and wanted to start small, we wouldn’t argue with you—but we’re simply going to hold what we have, partially because the relative performance (RP) line (not shown) is still lagging, and partially to avoid chasing our tail in this volatile name.” With a 36% gain on the stock in five-plus months, we will keep it at Buy for those who want to snatch up a few more shares on the recent resurgence. BUY

Dynatrace (DT), originally recommended by Tyler Laundon in Cabot Early Opportunities, added another point to hit new all-time highs! The stock is up more than 8% this month. The catalyst for this strong move remains a January 5 upgrade (to Buy from Hold) from Jefferies analyst Brett Thill, who set a price target of 70 for this AI-powered data analytics upstart. That’s still 19% above the current share price. So, we’ll keep the stock at Buy even with a 25% gain in three months. BUY

Elastic N.V. (ESTC), originally recommended by Tyler Laundon in Cabot Early Opportunities, pulled back to 119 after topping out at 123 a week ago. Mike sees this mini-pullback as a buying opportunity, as he wrote last week: “While many tech-related names look extended, we think ESTC is fresher—still having decisively broken out in early December on earnings and showing some power (it recently ramped to new high ground) of late as money has flowed back to AI-related names. (Not to delve too deeply into the chart, but the weekly chart shows only low volume on the down weeks, while the breakout and thrust last week came on big trade.) Yesterday’s action was sloppy along with most tech stocks, but we think Elastic’s story (its search platform could be the foundation that many AI models are built on) and overall pattern are excellent. While a pullback is possible if the Nasdaq fades some, we like the overall pattern—we’ll fill out our position here, buying another half-sized (5% of the account) position, and use a mental stop near the century market for the entire stake.” With a 56% gain in less than three months, we’d still advise keeping new buys on the small side. Last week, in fact, I suggested selling a few shares if you got in early after our November 7 recommendation. But this pullback might be a solid entry point for new buyers. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is right back to its highs after a brief dip. In his latest update, Tom wrote, “This superstar big pharma stock has been a lot like AVGO. It periodically surges higher and then consolidates by going sideways for a while until the next surge higher. LLY closed with a 2023 return of 60% and an average annual return of 52% over the last three years. LLY is already up double digits in 2024. The good times may continue.

“Weight loss drug Mounjaro was approved by the FDA in November. 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. Earnings are expected to grow at about a 25% per year clip over the next several years, but that number could be higher with the new drugs.” Ahead of fourth-quarter earnings next week (February 6), we’ll keep this new growth leader at Buy. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, has been chopping around in the high 12s/low 13s since advancing from the high-10/low-11 range in the first half of January. This leading cannabis company is likely in a holding pattern like other cannabis stocks as the industry awaits a decision from the Drug Enforcement Administration (DEA) on rescheduling marijuana from a Class I to a Class III drug. Other potential catalysts abound, including ongoing legalization efforts in the U.S. and Europe. This looks like a good place to start a new position if you’re not already in. BUY

Intel Corporation (INTC), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is down 10% since we last wrote after earnings missed the mark. Or really, the guidance was a problem: The company expects revenues in the current (first) quarter to be in a range between $12.2 billion to $13.2 billion, shy of the $14.2 billion analysts were looking for. That prompted an analyst downgrade from Needham, which dropped it to Hold from Buy. The major takeaway is that AI is still just a theoretical part of Intel’s story – and not an actual one, yet. Shares are now trading below their 50-day moving average – though are still above the 200-day. We now have a very mild loss on the stock. We’ll hang on to it and see if it bounces back this week in case the selling was overdone – Q4 revenues and earnings topped estimates, after all. But let’s downgrade to Hold. MOVE FROM BUY TO HOLD

Krystal Biotech (KRYS), originally recommended by Tyler Laundon in Cabot Early Opportunities, fell sharply this week after touching new highs above 130. Maybe Tyler was on to something a week ago when he decided to sell this stock before it dropped! Here’s what he wrote then: “Krystal Biotech (KRYS) struggled in November after Q3 sales missed, likely because patients didn’t convert to Vyjuvek as quickly as expected once the drug was approved. But KRYS got back into a groove in December and is currently pushing up against overhead resistance near 130 – 133. The big questions lingering from the Q3 call surround conversion of new patients and pricing. My hunch is that we won’t know much more until around March 12 when KRYS is expected to report, and without new information shares won’t be able to break significantly higher. I like KRYS but am a little concerned about what could happen to the stock if Q4 results don’t address all the issues from Q3. Therefore, with some questioning of the decision, I’m going to sell KRYS today.” Seems like the right decision. Let’s follow suit and get out with a small gain. MOVE FROM BUY TO SELL

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, keeps rising to new highs, eclipsing 400 for the first time! Tomorrow’s (January 30) earnings report may test its resolve. Analysts are anticipating 10% EPS growth. The company has beaten earnings estimates in each of the last four quarters. Stay tuned. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, has settled into a range between 105 and 108 after another big run-up in December. Its place as a co-leader in the weight-loss drug market (along with LLY, above) is secure, and Goldman Sachs estimates it could become a $100 billion market by 2030. Thus, shares of the Danish pharma giant likely are far from peaking. The company reports earnings this Wednesday, January 31, so perhaps that will be just the thing to spur a new rally. Analysts expect 47.7% EPS growth on 26.4% revenue growth. BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, mostly held its ground after a big run-up the week before. In his latest update, Mike wrote, “NTNX remains super strong, with some bullish analyst commentary (especially surrounding the firm taking share from VMware, which was just taken over by Broadcom), a strong market and lingering M&A rumors propelling shares to all-time highs on big volume. That’s obviously great to see—though we decided to book some partial profits last week, taking advantage of the strength to put some money in our pocket while still holding onto a good-sized position. … (T)hat wasn’t about picking a top—it’s more about portfolio management, feeding the ducks while they’re quacking, and then giving our remaining shares plenty of rope to ride out what ideally will morph into a longer-term trend.” With a 53% gain in less than four months, we’ll keep the stock at Buy. But as Mike said, it does make sense to book profits on a few shares – perhaps a quarter of your original stake – if you bought shortly after our October 10 recommendation. BUY

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, finally broke out of the 36-37 range to reach 38, a new 52-week high! There was no news, though it’s perhaps a delayed bump from an Argus Research upgrade (to Buy from Hold) on January 18. Earnings are due out in early February. As Mike noted last week, revenue is expected to double in 2024. BUY

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, keeps bouncing around between 102 and 109 ahead of this Tuesday’s earnings report. In his latest update, Mike wrote, “Pulte and other homebuilders have finally hit some turbulence, with blue-chip builder D.R. Horton the culprit—that blue-chip builder reported results this week, and while the metrics were solid (new orders were up 38% in dollars!), big investors sold the news, driving the group (and PHM) lower. Our thoughts: Short term, after a very good run, our guess is PHM has some consolidating to do, especially as interest rates are testing key levels on the upside (see more on that later in this issue)—that said, one sour day doesn’t make a trend, and the underlying positives we’ve written about are still in place. All told, we’ll stay on Buy as the odds favor higher prices over time, but next week’s earnings report (due January 30) will probably tell the intermediate-term tale. If you own some, we advise hanging on, and we’re OK buying a small stake on this dip if you’re not yet in.” BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, keeps hitting new highs, up another 2.8% in the last week after a strong earnings report last Wednesday. Q4 earnings and revenue topped estimates, with EPS up 31% year over year while revenues improved by 26%. Subscription revenue for the software giant 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

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, on the other hand, is not clicking on all cylinders, as its latest disappointing quarter revealed. Earnings per share of 71 cents fell short of analyst estimates of 73 cents; revenues were up a mere 3% year over year despite a 20% increase in deliveries; and margins continued to narrow amidst aggressive cost-cutting across some of its most popular models. So, Wall Street sold more shares, knocking the stock back to 183 – its lowest point since last May. I’m not going to change our rating to Buy, but Tesla’s entire history – especially the last five years – has featured its share price roaring back every time it’s left for dead. This feels like another one of those moments; and indeed, the stock is up 3% in mid-day trading. The company remains the leader in the ever-growing electric vehicle space, and as other EV upstarts fall by the wayside, industry consolidation is likely to benefit the sector’s biggest brand down the road. If you don’t own Tesla, you likely wouldn’t regret buying it here, at eight-month lows. But I’m going to wait for the bleeding to stop before changing my rating. 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 to its late-December highs. Since we added the stock only two weeks ago, our timing was perfect! 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. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, keeps rising to new highs, topping 66 for the first time. In his latest update, Mike wrote, “UBER has earnings in a couple of weeks (due February 7) and, maybe as important, the firm will hold a virtual update session (sounds like a mini Investor Day) with the top brass a week later (February 14), where it’s possible the firm will have some updated EBITDA and free cash flow multi-year targets as well as tidbits about how some newer ventures are going (by all accounts, very good). Some analysts have been sounding valuation alarms of late, but those tend to be hit or miss—indeed, the stock looks fine, although the latest push to new price highs was not joined by the relative performance (RP) line (not shown). All told, we still see UBER as a liquid leader in two giant, growing fields (ride-sharing and delivery) and think the odds favor higher prices ahead. We’ll stay on Buy, but as with everything, try to enter on a bit of weakness.” BUY

Varonis (VRNS), originally recommended by Tyler Laundon in Cabot Early Opportunities, held firm at 45. As Tyler recently wrote, “Varonis (VRNS) has been acting very well among a fantastic backdrop for cybersecurity stocks (lots of bullish analyst commentary). The irony is that what’s good for these stocks is generally bad news for IT departments (rising threats). Varonis’ earnings date isn’t far off, it’s been confirmed for February 5. We’re looking for Q4 revenue growth of 6.5% ($151.8 million) to cap off a year of roughly 5% growth and for EPS of $0.23 to bring the 2023 total to $0.32. Looking into 2024, revenue growth is seen accelerating to nearly 10% (cloud transition still working well) and EPS growth should be at least 20% ($0.39 expected). VRNS is a well-liked stock among the analyst community and while the stock is looking a little stretched, I think any dips should be bought.” 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 5, 2024.

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