Cabot Stock of the Week Issue: January 8, 2024

Editor’s Note: Your next issue of Stock of the Week will arrive next Tuesday, January 16 due to the Martin Luther King Day holiday next Monday, January 15.

It was a rough first few days of 2024, with growth indexes falling as much as 5-6% and the Nasdaq off nearly 4%. But I wouldn’t read too much into it yet. The flipping of the calendar tends to produce the opposite results of the year that preceded it – see last January’s strong start after a brutal 2022 as supporting evidence. And besides, the selling appears to have been short-lived, with the major indexes up each of the last two trading days. Granted, fourth-quarter earnings season – which begins in earnest with some of the big banks reporting this Friday – could throw a more lasting wrench into the rally if things go awry. But with S&P 500 companies expected to grow earnings by 1.3% year over year, according to FactSet, things continue to look up for the U.S. economy, especially on the heels of a solid-if-unspectacular holiday shopping season (3.1% growth).

To account for the somewhat choppier investing climate, today we add an undervalued dividend stock that should benefit from the *likely* cuts coming to interest rates – and mortgage rates – this year. It’s a stock Tom Hutchinson recently recommended to his Cabot Dividend Investor audience, and here are Tom’s latest thoughts on it.

Alexandria Real Estate Equities (ARE)

Alexandria Real Estate Equities (ARE) is a U.S.-based Real Estate Investment Trust (REIT) specializing in office buildings and laboratories leased to tenants primarily engaged in the life science and technology sectors. It has over 800 tenants, most of them in locations that are clusters for innovation: greater Boston, the San Francisco Bay area, New York City, San Diego, Seattle, Washington, D.C.

The state-of-the-art laboratory properties are mostly clustered in urban life science, agricultural technology, and technology campuses in the U.S. Properties are leased to tenants under long-term triple net leases with automatic rent escalations. Triple net leases account for just about all of revenues.

Tenants pay for everything, including insurance, taxes, utilities, and maintenance. These leases provide a big advantage by eliminating unexpected and variable expenses, ensuring a much more predictable revenue stream.

These properties have high demand that should continue to grow for many years to come. Alexandria’s tenants are major pharmaceutical, biotech, life science, and technology companies. The biggest tenants include Bristol-Myers Squibb (BMY), Moderna (MRNA), and Eli Lilly (LLY).

For many years, ARE delivered the performance one would expect from a high-quality REIT operating in a growing space. It performed on par with the S&P 500 during a bull market with less volatility and blew away the returns of the REIT index in every measurable period for 10 years. But things turned ugly in 2022. Over the past two calendar years, ARE plummeted 40%.

The fall in price wasn’t due to internal or fundamental reasons. Revenues, earnings, and occupancy rates have remained solid. Revenues were up 10.9% in the first nine months of 2023 and earnings have grown in the high single digits. It’s the macro environment that has battered this stock.

REITs have been one of the worst-performing market sectors over the last two years because of rising interest rates. The benchmark Vanguard Real Estate Index Fund (VNQ) fell nearly 20% over 2022 and 2023. But ARE fell a lot more because of another issue: Alexandria is technically classified as an office REIT, and office space is in crisis. After the pandemic, many workers continue to work at home and are not returning to the office. In several major cities, office occupancy rates remain as low as 60%.

ARE has been subjected to the double whammy of rising interest rates and the crash of office properties. But the office problem doesn’t apply to Alexandria’s properties.

The market has been blind to the distinction and has thrown the baby out with the bathwater. Sure, if all you need is a cubicle and a computer you can work from home. But laboratories can’t be duplicated at home. And the related offices provide a level of innovation and collaboration that requires people to be there. That’s why Alexandria’s properties have a 93.7% occupancy rate, and that is only expected to grow in the quarters ahead.

Market overreactions are almost always corrected eventually. Investors are warming to REITs again because of peak interest rates, cheap valuations, and high dividends. The value offered by ARE is already being embraced. Since the end of October, after interest rates moved back down, ARE has soared 37%. But you haven’t missed the boat. The stock is still about 40% below the all-time high and earnings are higher now.

The yield is high at 4.0%. The dividend is well-supported with a payout ratio at just 55% of adjusted funds from operations (AFFOs), which is low for a REIT. The REIT also has $5.9 billion available in liquidity which is plenty of dry powder for future growth.

The main risk in 2024 is a slowing economy. Alexandria has highly defensive earnings that should thrive regardless of the economy. ARE presents a rare opportunity to get a much higher total return than is usually possible from an investment this defensive. The stock currently offers much more upside potential than downside risk.

Current Recommendations

Changes Since Last Week:

DraftKings (DKNG) Moves from Buy to Hold

No sells again this week, so despite our inclination to cut with the Stock of the Week portfolio already at 25 stocks entering the week, we now expand to 26. That’s a lot of stocks, but there simply aren’t any portfolio positions that stand out like a sore thumb – and I’d rather deal with the minor headache of tracking “too many” stocks than prematurely subtract one that’s still in relatively solid shape. It’s a good problem to have.

The only change we do have this week is to downgrade DraftKings (DKNG) to Hold on some modest weakness, though it was enough to knock the stock below its 50-day line. Here’s what’s happening with all our stocks as we enter the first full trading week of 2024.

Updates

10x Genomics (TXG), originally recommended by Carl Delfeld in his Cabot Explorer advisory, dipped from 55 to 51 since we last wrote, on no news. However, this morning the company reported preliminary full-year and fourth-quarter revenue results, which could help stop the bleeding: Q4 revenues were up 18% year over year, while full-year 2023 revenue improved 20%. Those results are unaudited and are thus unofficial, reported as part of 10x’s presentation at the just-underway J.P. Morgan Healthcare Conference. 10x is a leader in the emerging field of “spatial biology” which is a cutting-edge life science for making new discoveries about human health and disease. BUY

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is up more than 7% in early trading today to get back to its highs above 21 (roughly in line with where it was to end 2023). A raised Q4 sales outlook on the back of a strong holiday quarter is responsible for today’s buying; the clothing retailer said fourth-quarter revenues likely improved by low double-digit percentage, better than anticipated. American Eagle’s stronger-than-expected quarter is in line with the surprisingly resilient U.S. retail market as a whole, which saw 3.1% sales growth over the holiday shopping season (November 1 – Christmas Eve). BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, keeps holding steady right at 11. There’s been no news for this U.K. life insurance and investment management firm of late. Shares have 29% upside to Bruce’s 14 price target. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had pulled back along with the market so far this year, falling from highs above 133 to 123 as of this writing. Still, the trend of this “Bull Market Stock” (Mike term) remains decidedly up, with shares rising 37% since late October. As long as this mini-pullback is just a blip and the bull market doesn’t suddenly collapse, this looks like a good entry point. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, is in the midst of a modest pullback, which is not unexpected after its huge (80%+) return in 2023. There’s been no news. This mini-dip looks like an ideal buying opportunity into one of the market’s great (AI-fueled) comeback stories. BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, gave back a point this week, but is comfortably above its late-December bottom at 50. However, bearish bets against the Chinese EV maker have reached their highest point since September, with short interest hitting 5.5% of the stock’s free float in Hong Kong, according to data tracker IHS Markit. The growing pessimism is based on both China’s ongoing economic weakness and the company’s own inevitable slowing sales growth after tripling revenues in 2022 and 60% growth last year; analyst expect 24% top-line growth this year. That’s still pretty good, and with the stock trading at a price-to-sales ratio of less than 1, I’m still of the mind that this is a wildly undervalued stock in a company that’s legitimately going toe to toe with Tesla on a global stage. Still, until shares perk up in a meaningful way, we’ll keep our rating at Hold. HOLD

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, keeps holding at 43. There’s been no news. Earnings are due out January 25, so that could be just the thing to get the stock out of its current rut. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, has bounced back from its mini-dip to start the year and is closing in on its December highs (which were also all-time highs). There was no news. We now have a 59% gain on this cybersecurity stock in just four months! BUY

Dave & Buster’s (PLAY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has backtracked a bit from its late-2023 highs, falling from 55 to 51. There’s been no news. The stock is up more than 33% in the last year but trading well below its 2017 highs at 69. After a huge run-up in November and December, the stock was due for a breather. Looks like a good entry point. BUY

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, tumbled from 35 to 33, and has dipped below its 50-day moving average, prompting Mike to sell a few shares. Here’s what Mike had to say in his latest update: “DraftKings (DKNG) had a great-looking, earnings-induced breakout in October and enjoyed a decent run for about a month after that—but then it ran into trouble, and this week’s selling cracked the 50-day line and brought shares back to where they were in August. (To be fair, the Nasdaq was just 1% above its summer highs yesterday, so there’s a lot of this going around.) Today’s rebound was encouraging; DKNG has a history of being herky-jerky and the story is outstanding, so we’re willing to hold on to what we have left and see if a fresh rally can come.” Last week, I wrote that the stock looks buyable as long as it doesn’t dip below 34. Now that it’s at 33, let’s downgrade to Hold until it can get its act together. MOVE FROM BUY TO HOLD

Dynatrace (DT), originally recommended by Tyler Laundon in Cabot Early Opportunities, is right where it was when we last wrote, in the high 52s, though it did briefly dip below 52. An upgrade from Jefferies, from Hold to Buy, seems to have sparked the rebound. Analyst Brett Thill set a price target of 70, or about 32% higher than its current price. Here’s a portion of what Thill had to say in his research note: “Dynatrace provides an AI-powered data analytics platform for application performance monitoring (APM), information technology (IT) infrastructure monitoring, and application security. The platform gives companies complete visibility of their IT systems, improves application performance, and reduces downtime by predicting IT issues and remediating problems faster when they occur. Dynatrace is trusted by more than 3,000 large enterprises, including many of the world’s largest financial institutions, health care companies, retailers, and government agencies. With nearly 20 years of monitoring experience, petabytes of IT telemetry data, and the most powerful AI engine in the space, Dynatrace is the best-positioned vendor to serve these large customers. The company is recognized as a technology leader in its category, helping its clients remediate issues faster than most competitors. As a result, Dynatrace has low churn, commands industry-leading free-cash-flow (FCF) margins, and it is winning market share as customers consolidate their IT monitoring spending away from legacy point solutions onto the Dynatrace platform. We see a long runway for profitable growth as customers expand their digital applications and cloud footprints, consolidate more spending onto Dynatrace, and embrace new complementary products.” BUY

Elastic N.V. (ESTC), originally recommended by Tyler Laundon in Cabot Early Opportunities, hasn’t budged since we last wrote, at least not in the aggregate. It still trades right around 106-107, down from its December highs above 117 but well clear of its moving averages. A pullback after a huge run-up post-earnings was to be expected, especially considering most growth stocks got slammed last week. Today’s 2.5% upmove is encouraging. Keeping 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 our biggest movers of the last week, rising 4.5% to nearly match its 2023 highs at 619 – perfect timing given that we upgraded it back to Buy last week! Why the strength? Nothing specific – Mike Cintolo says it looks like the biopharma giant was “playing possum” the last couple months, biding its time before another big run to start the year. The company continues to reap the rewards from its breakthrough obesity drug, Mounjaro. We now have an 86% gain on the stock in just 10 months. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, is off to a far more auspicious start than our previous attempts at buying low on cannabis, up more than 8% since we added it to the portfolio last week. There was no news for the company or the industry, but it’s possible investors are slowly warming to the idea of getting back in cannabis given the myriad potential catalysts out there. And Green Thumb is one of the leading companies in the cannabis space. So far, so good. Buy if you haven’t already done so, especially on today’s modest dip. BUY

Intel Corporation (INTC), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is unchanged net-net since last week, “holding” at 48. The company’s ever-expanding AI portfolio has driven the company’s revival, with Intel’s latest AI-related offering being the Meteor Lake CPUs, built-in hardware that enables AI workloads to be run locally on personal computers (example: blurring your background on a Zoom call for you). The stock has plenty of momentum, up 34% in the last three months. BUY

Krystal Biotech (KRYS), originally recommended by Tyler Laundon in Cabot Early Opportunities, is down 4.5% since we last wrote, coughing up about half its late-December gains. No news. This small-cap biotech continues to be a roller coaster ride, but we do have a modest gain on it after three and a half months, so let’s hang in there for the upside. Trading well above its moving averages, this latest dip looks quite buyable. 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, is off to a solid start in 2024 like fellow weight-loss drug giant Eli Lilly (see above). Shares are up nearly 3% despite the pullback in the major indexes. In his latest update, Carl wrote, “I expect the stock to continue its momentum into 2024. Novo is carving out a huge market for diabetes and obesity that Goldman Sachs estimates will reach a $100 billion market by 2030. Novo Nordisk is poised to open a new AI research hub in the heart of London as it seeks to build on its weight-loss drug success. Ozempic and other drugs like it have proven powerful at regulating blood sugar and driving weight loss. Now, scientists are exploring whether they might be just as effective in treating a wide range of other conditions, from addiction and liver disease to a common cause of infertility.” BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, keeps holding in the 45-47 range. There’s been no news. We have a 26% gain on the stock in just three months. BUY

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is up from 36 to 37 since we last wrote, with all the gains coming today on no news. A move back above mid-December highs at 38 would be quite bullish. BUY

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, has been holding in the 100-104 range for about the last month, which is impressive considering it ran up from as low as 69 in late October. In his latest update, Mike wrote, “PulteGroup (PHM) is still in solid shape, above its 25-day line as the big dip in mortgage rates (they’re actually about level with the year-ago level!) and still-strong economy should goose demand in the months ahead (including during the key spring selling season in many key locations).” BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, is rebounding nicely after a brief dip, and is up slightly since we last wrote. The company will report earnings on January 24. We have a 24% gain on this large-cap software stock. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been in a downtrend since the new year began, and is nearing December lows. The latest thing weighing on shares? You guessed it: Elon Musk. (Sigh.) A Wall Street Journal report that board members are concerned about the Tesla CEO’s use of hardcore drugs is the latest example of its founder’s extracurricular activities and comments throwing cold water on its share price. But again: the negative news about Musk has little to do with the company itself. Given that the stock is still trading below its 200-day line, I wouldn’t buy the bad news in this case, though I do believe shares will bounce back in short order, especially as we approach the fourth-quarter earnings report, out in late January. HOLD

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, held steady in the last week, a good sign after a sharp pullback from 63 to 57. In his latest update, Mike wrote, “Uber (UBER) is in the camp of stocks like NTNX—the drop this week has drawn some blood, but given the prior upmove (40 to 63, now down to 58), or even from the breakout (49 to 63 down to 58), it seems reasonable thus far. With the 50-day line around 55, we’d expect support to arrive soon if all is well—if not, we’ll take defensive measures, but right now the evidence tells us the path of least resistance remains up.” BUY

Varonis (VRNS), originally recommended by Tyler Laundon in Cabot Early Opportunities, is down slightly since we last wrote, but today’s 3% uptick has made the drop-off almost negligible. There’s been no news, and there’s nothing on the immediate horizon, with earnings not due out until February. So you can buy now if you missed our recommendation in late November. 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. BUY

The next Cabot Stock of the Week issue will be published on January 16, 2024.