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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week Issue: January 3, 2023

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Happy New Year! Here’s to 2023 being a much better year for investors than 2022. It wouldn’t take much.

The S&P 500 was down 19.4% last year, its worst annual performance since 2008 and fourth-worst since the index launched in 1957. (The Nasdaq fared much worse, down 33%.) Only three times since its inception has the S&P had back-to-back down years: 1973-74, and 2000-01 and 2001-02, when stocks fell for three straight years after the dot-com bubble burst at the turn of the century. Combine that with the fact that inflation is coming down, the Fed is likely to throw the brakes on interest rates in the first half of the year, and an impending recession is likely already at least partly priced in, and there are plenty of reasons to be optimistic about 2023.

In the spirit of optimism, today I’m adding a mid-cap growth stock recently recommended by Cabot Early Opportunities Chief Analyst Tyler Laundon. Here it is, with Tyler’s latest thoughts.

Chewy (CHWY)

The typical playbook for investing in a recession calls for owning shares in companies that sell things people need every day. Think consumer staples, healthcare services, prescription medicine.

While the jury is still out on whether or not the U.S. will enter a recession in 2023, it makes sense to employ part of this playbook today. But let’s put a twist on it and buy stock in a company selling must-have supplies for pets, not people.

Chewy (CHWY) is a pure-play U.S. online retailer for pet supplies. The company has a market cap of $15 billion and just reported a better-than-expected Q3 fiscal 2023 (fiscal 2023 ends in January) a few weeks ago.

There are no guarantees for any stock in a weakening economy. But pet supply retailers are among the last to see spending cuts. Like grocery stores, these businesses sell products that customers need and some they just want.

Chewy management says that 83% of net sales come from non-discretionary categories of pet food and healthcare. That doesn’t make the company’s stock recession-proof. But it gives it a pretty solid cushion, especially in a mild recession scenario. And if we get a no-recession scenario, the stock could do extremely well.

The company has 20.5 million active customers (up 1% over the last year and 9% over the last two years) and sells more than 100,000 products spanning pet products (branded and private label), prescription food and Rx medication products.

In recent quarters Chewy has benefited from more stable supply chains, investments in logistics, fulfillment center automation (two new centers are automated now, three more will be soon and retrofit of existing centers is underway), careful inventory management, and reduced pricing in some categories.

The company has also expanded its CarePlus suite of insurance and wellness offerings, launched Vibeful, a private brand of non-prescription supplements, and has begun testing sponsored ads on Chewy.com.

Combined with continued growth of its Autoship program (up 19% to reach 73% of total sales in Q3 fiscal 2023), which allows customers to subscribe to regular orders of the same products, these initiatives are driving higher investor interest in CHWY stock.

In Q3, net sales per active customer (NSPAC) rose by 14% to $477. Revenue rose 14% to $2.53 billion while EPS of $0.01 improved from a loss of -$0.08 in the year-ago quarter. Analysts see full-year fiscal 2023 revenue up 13% to just over $10 billion. Adjusted EPS should be around -$0.01.

In fiscal 2024 revenue is seen rising 10% to $11 billion and EPS is seen up 10-fold to $0.10.

CHWY went public at 22 in June 2019 and shot up 59% in its first day. The bull market during the pandemic, especially among online specialists, helped CHWY surge to an all-time high of 120 in February 2021.

The road to the 2022 low of 22.2, struck in May, was similar for CHWY as it was for many other high-growth pandemic favorites. There were pockets of strength here and there but, big picture, it was a drawn-out slide characterized by lower highs and lower lows.

CHWY came off the May low and enjoyed a run to 52 in August, but another drawdown had shares at 30 a few weeks later. CHWY’s chart began to shape up last fall, though the stock drifted lower in the second half of December.

With CHWY currently trading right around its 200-day moving average line and investors waiting for an update on holiday sales, there is some near-term uncertainty here. However, this is the type of business that should offer considerable upside if things go better than expected and a decent amount of downside protection if they don’t.

chwy_spw.png

CHWYRevenue and Earnings
Forward P/E: 105 Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
Trailing P/E: N/A (bil) (vs yr-ago-qtr)($)(vs yr-ago-qtr)
Profit Margin (latest qtr) -0.21%Latest quarter2.5314%0.01113%
Debt Ratio: 85%One quarter ago2.4313%0.05225%
Dividend: N/ATwo quarters ago2.4314%0.04-56%
Dividend Yield: N/AThree quarters ago2.3917%-0.15N/A

Current Recommendations

Stock

Date Bought

Price Bought

Price on 1/3/23

Profit

Rating

Arcos Dorados (ARCO)

9/7/22

7

8

9%

Buy

BioMarin Pharmaceutical Inc. (BMRN)

12/13/22

107

102

-5%

Buy

Centrus Energy Corp. (LEU)

7/26/22

29

35

20%

Hold

Chewy (CHWY)

NEW

--

35

--%

Buy

Cisco Systems Inc. (CSCO)

12/6/22

49

48

-3%

Buy

Comcast Corporation (CMCSA)

11/1/22

32

35

9%

Buy

Corteva, Inc. (CTVA)

11/15/22

66

59

-11%

Hold

Enphase Energy (ENPH)

6/28/22

198

253

28%

Hold

Green Thumb Industries Inc. (GTBIF)

10/18/22

11

8

-25%

Hold

Kinross Gold Corp. (KGC)

10/11/22

4

4

17%

Buy

NerdWallet (NRDS)

11/29/22

--

--

--%

Sold

NextEra Energy, Inc. (NEE)

12/19/22

84

83

0%

Buy

Novo Nordisk (NVO)

12/27/22

133

83

-38%

Buy

Realty Income (O)

11/22/22

65.385

63

-3%

Buy

Tesla (TSLA)

12/29/11

2

106

5793%

Hold

Ulta Beauty (ULTA)

5/10/22

382

472

23%

Buy

Wingstop (WING)

11/8/22

157

135

-14%

Sell

WisdomTree Emerging Markets High Dividend Fund (DEM)

10/4/22

34

36

4%

Buy

Xponential Fitness, Inc. (XPOF)

9/27/22

18

23

25%

Buy

Changes Since Last Week’s Issue:

Wingstop (WING) Moves from Hold to Sell

We have one sell this week – Wingstop (WING), which is a good cookie-cutter growth story, but the stock just hasn’t performed, like most growth stocks of late. So, that keeps our portfolio at 17 stocks with the addition of Chewy (CHWY). All our other stocks either held firm (at least in the aggregate) in the last week or continued to rise; a couple are at multi-year highs!

So, let’s get right to it. Here’s what’s going on with all our stocks as we enter the new year.

Updates

Arcos Dorados (ARCO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, continued to build on its end-of-year breakout, inching to a new three-year closing high above 8.30 on the final day of 2022. The stock is now up about 22% in the last two months. That puts ARCO shares on the cusp of Bruce’s 8.50 price target, prompting him to downgrade the stock to a “Hold” in his latest issue. But since we’re not strictly value investors, we’ll keep it at Buy for now and see how high the stock can go. If you’d like to sell a few shares and book some profits to cash in on the recent run, that’s a fine choice as well. BUY

BioMarin Pharmaceutical Inc. (BMRN), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was flat this week and remains in a trading range between 102 and 108. Mike likes the stock as a potential industry leader in the biotech space. In a recent update, Mike wrote, “BioMarin (BMRN) continues to act just fine in the wake of its breakout in late November, with the latest dip looking very controlled thus far. If you didn’t buy it a couple of weeks ago, we’re OK taking a stab at it in this range, with a stop in the low/mid-90s.” BUY

Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, was down another point this past week, and keeps ping-ponging between 31 and 32; perhaps a breakout is forthcoming. In his latest issue, Carl wrote, “Centrus Energy (LEU) surprised investors as it came out with a quarterly loss of $0.42 per share versus the Zacks consensus estimate of $0.78. This compares to earnings of $2.95 per share a year ago. This nuclear fuel supplier for utilities in the U.S. and abroad has net income margins above 50% so far this year with new nuclear fuel sales contracts and commitments worth an estimated value of $270 million. Nuclear power provides 20% of the power for our electricity grid and more than 50% of U.S. emission-free energy, according to the Department of Energy.” HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, remains steady in the 47-48 area. In his latest update, Bruce wrote, “Cisco Systems (CSCO) is facing revenue pressure as customers migrate to the cloud and thus need less of Cisco’s equipment and one-stop-shop services. 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, generates vast cash flow (which it returns to shareholders through dividends and buybacks) and has a very strong balance sheet.

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

“CSCO shares … have 38% upside to our 66 price target. The valuation is attractive at 9.4x EV/EBITDA and 13.4x earnings per share. The 3.2% dividend yield adds to the appeal of this stock.” BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, remains stuck in the same 34-36 range it’s been in for the last seven weeks. In his latest update, Bruce wrote, “With $120 billion in revenues, Comcast is one of the world’s largest media and entertainment companies. Its properties include Comcast cable television, NBCUniversal (movie studios, theme parks, NBC, Telemundo and Peacock), and Sky media. The Roberts family holds a near-controlling stake in Comcast. Comcast shares have tumbled due to worry about cyclical and secular declines in advertising revenues and a secular decline in cable subscriptions as consumers shift toward streaming services, as well as rising programming costs and incremental competitive pressure as phone companies upgrade their fiber networks.

“However, Comcast is a well-run, solidly profitable and stable company that will likely continue to successfully fend off intense competition while increasing its revenues and profits, as it has for decades. The company generates immense free cash flow which is more than enough to support its reasonable debt level, pay a generous dividend (recently raised 8%) and sizeable share buybacks.

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

“Comcast shares … have 20% upside to our 42 price target. The shares offer an attractive 3.1% dividend yield.” BUY

Corteva (CTVA), originally recommended by Carl Delfeld in his Cabot Explorer advisory, appears to have established a bottom at 58. That’s the good news. The bad news is the stock keeps trading right around that bottom and is still down 12% since topping out above 67 a month ago. We’ll keep holding as long as the stock can stay north of 58; any dip below it, and we’ll Sell. In his latest update, Carl wrote, “Corteva (CTVA) shares were unchanged as this DowDuPont agricultural sciences spin-off offers products to help farmers increase output and acre productivity. Corteva uses emerging technology to help farmers improve crop yields and boost output. While the market was down sharply (in 2022), Corteva was up more than 24%. Although the down market does lead to quality companies growing revenue and net profits trading at bargain prices, a strong case can be made for stocks like CTVA that are recession-resistant and outperforming the market on a relative basis. Recently, Corteva reported a 12% increase in net sales and beat earnings expectations by about 50%.” HOLD

Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is in a bit of a freefall, losing 20% of its value since mid-December. We’re still way up on the stock, which was our single best performer of 2022, but the precipitous drop-off was enough to downgrade it to Hold last week. We’ll keep holding, looking for a bottom to materialize, hopefully, this week. In his latest update, Mike wrote, “This year has been one of rolling selling, meaning a few nooks and crannies get hit, and then a few weeks later, the sellers move on to some other pasture. After holding up well, one of the latest targets has been solar stocks, with Enphase and others hitting the skids. We doubt there’s anything wrong fundamentally here, though an important question will be 2023 earnings growth—as 2022 has boomed, analysts see ‘only’ a 23% gain next year, which is almost surely conservative but could factor into some buy/sell decisions. Plus, the implosion in Tesla and other green stocks isn’t helping the cause. As usual, we’ll just play it by the book: ENPH’s action is certainly poor, but there’s some support in this area (260-265); if shares can bounce early in the new year, we’ll hold on.” HOLD

Green Thumb Industries (GTBIF), originally recommended by Tim Lutts and then Michael Brush in the Sector Xpress Cannabis Advisor, fell off a cliff in December after an encouraging October and November. Since December 5, the stock has lost nearly half its value! Most of those losses are due to the failure of the SAFE Banking Act to pass through Congress, though there’s still a chance it will soon. In his latest update, Michael did a much deeper dive on Green Thumb, and why there are reasons to be optimistic it’ll soon bounce back: “Chicago-based Green Thumb is our portfolio’s largest position. Green Thumb was the third-largest cannabis company in the U.S. in the third quarter, with operations in 15 markets. But it will likely fall to fourth after Cresco’s acquisition of Columbia. Yet it has been the most profitable multistate operator of all the big ones, based on its consistent record of profitability over the past nine quarters – a sign of good management.

“Green Thumb manufactures and distributes a portfolio of branded cannabis products including &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 77 retail stores.

“Green Thumb is expanding its medical footprint in Florida through a lease agreement with the convenience store chain Circle K. Through this exclusive agreement, Green Thumb can lease space adjacent to Circle K stores. Green Thumb is starting with a ‘test and learn phase’ that will see about a dozen medical dispensaries at Circle K convenience stores and gas stations in 2023. This could be a big deal since the Circle K chain has 600 locations in Florida.

“Green Thumb reported 3% sequential Q3 sales growth and 12% year-over-year growth to $261 million, on November 2. Year-to-date revenue increased 17% to $758 million compared to the first nine months of 2021.

“Revenue growth was primarily driven by increased retail sales in New Jersey and Illinois, the addition of 12 retail locations, and increased store traffic. Same-store sales (at stores open for at least 12 months) declined 1.6% as price compression offset continued traffic and volume growth. Gross margins slipped to 50.2% from 55.4% in the comparable period last year. Green Thumb posted its ninth consecutive quarter of positive net income, delivering $10 million, or four cents a share in profits. The company reported $48 million in cash flow, and cash of $147.3 million against $255.5 million in debt.

“Key performance drivers for the retail business for the quarter were: Legalization of adult-use sales in New Jersey; new store openings and store purchases, particularly in Illinois, Maryland, Massachusetts, Minnesota, Rhode Island, and Virginia; and increased store traffic particularly in Illinois.

“Green Thumb trades at a price-to-sales ratio of 1.98, which seems reasonable given its 12% year-over-year sales growth. Ongoing market developments in Illinois and New Jersey could be strong catalysts for Green Thumb Industries, says Stifel, which has a buy rating on the stock. Illinois will increase its store footprint by more than 2.5 times. Considerable upside exists in New Jersey as product offerings expand.

“A positive here is that Green Thumb is founder-run. 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.”

Michael rates GTBIF a Buy, but we downgraded to Hold last week. We’ll keep it there until the stock can build momentum again. HOLD

Kinross Gold (KGC), originally recommended by Clif Droke in his Sector Xpress Gold & Metals Advisor, remains in a range between 3.95 and 4.38. A break higher could be coming if and when the market gets its act together again, so we’ll keep it at Buy. BUY

NextEra Energy (NEE), originally recommended by Tom Hutchinson in Cabot Dividend Investor, has been stuck in the same 83-84 range for the past two weeks. Any advance in the market could bring a breakout. So, if you didn’t buy this safe utility stock when we added it to the portfolio two weeks ago, you can still get it at virtually the same price. In his latest update, “Defense is back. There’s something about a looming recession that turns investors to the safest stocks. That’s why utilities are the second-best-performing market sector YTD and the best-performing over the last month. NEE has moved 24% higher since the fall low. Sure, NEE isn’t as cheap as it was but it has established a solid upside trend and has momentum.” BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was up 3.5% in its first week in the portfolio and is currently trading at new all-time highs. That kind of momentum is rare in today’s market, and why Carl recommended it a month ago and why we added it last week. In his latest update, Carl wrote, “Novo Nordisk (NVO) shares were up again this week. Novo Nordisk holds a 31.6% share of the diabetes care market and should carry its momentum into next year. In the first nine months of the year, sales of Rybelsus soared by 140% year over year and Ozempic’s revenue jumped by 86% year over year

“Novo Nordisk (NVO) specializes in treatments for diabetes, hemophilia, and obesity. The company supplies half of the world’s insulin, and its diabetes care products are used by over 34 million people today. Novo highlights that more than 750 million are currently living with obesity and that this is up a multiple of 3X since 1975. In summary, based on its sizable and growing demand for this weight-loss drug, this well-managed, highly profitable company with an excellent growth profile has limited risk and potential to develop new products.” BUY

Realty Income (O), originally recommended by Tom Hutchinson in Cabot Dividend Investor, is holding smack in the middle of the 61–65 range it’s been in for the past two months. In his latest update, Tom wrote, “Sure, the rally from the October low ran out of gas. The stock has been on a sideways and bouncy track for the last month. But it held up remarkably well in the latest round of selling, which took down just about everything else. Investors appear to be coming around and appreciating a defensive and legendary income stock amid the current uncertainties. I expect more of the same in the early part of next year as we move toward a recession and possibly a new market low.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was finally showing signs of life, rising from 109 to 123 in the last couple trading days of 2022. This morning, it coughed up all of those gains in one fell swoop, falling all the way to 106. This time, the culprit wasn’t Elon Musk; it was a fourth-quarter delivery miss. Tesla delivered 405,278 cars globally in Q4, shy of analyst expectations of 420,760 deliveries. For an investing environment ready to sell on any sign of weakness, that was more than enough, even after the stock lost 70% of its value in the last year-plus. For the year, Tesla’s deliveries were up 22% over 2021, reaching 1.31 million deliveries, so the business certainly isn’t broken. The problem is the company had targeted 50% growth for the year, so it was well short of that number. China’s Covid-related shutdowns and ongoing supply chain issues contributed to the shortfall, according to Tesla. And the company is still on track for a 53% revenue increase in 2022 and another 36% improvement in 2023, combined with double-digit EPS growth both years. Those are still very impressive numbers for a company of Tesla’s size. Combine them with a share price that’s 70% off its November 2021 peak, and chances are you’d make money in the intermediate to long term if you bought the stock now. But we’ll keep TSLA at Hold until it can establish a firm bottom. HOLD

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up another 2% in the last week and has recovered most of its mid-December losses. This beauty retailer continues to be one of our best performers and is still riding the coattails of a very strong third quarter, reported in early December. Comparable-store sales improved 14.6%, well ahead of the 8.8% jump analysts anticipated. Net income increased 27.5% year over year, to $274.6 million. And full-year earnings guidance was raised to a range of $22.60 to $22.90, ahead of the $20.70 to $21.20 expected. BUY

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, was off another 7.5% this week and has been back-sliding for about a month, down 18% since the end of November. With no sign of a bottom and about a 14% loss since we added the stock just under two months ago, let’s go ahead and Sell WING today. I’m sure it will be a good stock again soon, but this is a tough environment for growth stocks, so let’s limit ours to only our top performers in an effort to start the new year off on the right foot. MOVE FROM HOLD TO SELL

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is holding firm in its 34–37 range. The fund offers a high dividend yield and some of the highest-quality emerging market stocks in the world with an average price-to-earnings ratio of around 5. This ETF gives broad exposure with an emphasis on income and value. BUY

Xponential Fitness (XPOF), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, has been building a nice-looking base in the 21-22 range while most other growth stocks have fallen sharply. A breakout similar to the one it had in November could be forthcoming … IF the market can shake off the cobwebs. The company is the leading franchisor of boutique fitness studios in the U.S., and it recently expanded its growing international presence by inking a master franchise agreement in Japan that gives Xponential the option to license a minimum of 100 new fitness studios in Japan over the next eight years. BUY


The next Cabot Stock of the Week issue will be published on January 9, 2023.

Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week.