Cabot Stock of the Week Issue: January 9, 2023

Stocks have gotten off to a nice start in 2023, with all of the gains coming last Friday and today. Five trading days don’t tell us much, but it beats another down week. Plus, it sets the right tone for the “2023 will be much better” theory. And with no recession in sight – the unemployment rate dipped to 3.5% in December, matching pre-Covid lows – there’s reason for optimism, even if the selling wasn’t limited to 2022.

The world is reopening, and that – at long last – includes China. So today, we add a stock that, while not actually a Chinese stock (the company is based in Nevada), stands to benefit from the end of China’s “zero Covid” policy. It was a pre-pandemic favorite of Cabot Top Ten Trader Chief Analyst Mike Cintolo, and there’s reason to believe in it again today.

Here it is, with Mike’s latest thoughts.

Las Vegas Sands (LVS)

If you’re a growth investor, you think of most of 2020—at least the portion that occurred after the pandemic crash in March—as being very fruitful, as work-from-home stocks and anything cloud- or e-commerce-related took flight. But the fact is that most of the market, while bottoming in March and bouncing into June, really didn’t take off until November … after the vaccine announcements caused investors to start discounting a big economic reopening. It caused a great run for the broad market that basically persisted until the bull market topped in late 2021.

No situations are exactly alike, and this one doesn’t involve a vaccine—but just over two years later, it’s looking like China is about to follow the U.S.’s reopening script, with a similar discounting of better times ahead for many leading firms in the country.

If China is in a bull move, there should be many ways to play it, but the most direct we can see is via travel- and entertainment-related firms—partly because of just how severe the shutdowns were, which in effect led to a “double-dip” Covid recession. Take Macau, for instance, the gambling mecca in China that was many times the size of Las Vegas (revenue-wise) a few years back. Just before the virus hit in late 2019, quarterly mass market gaming revenue (tables and slots) in that area was around $5.5 billion. That obviously fell to nearly zero in the summer of 2020 (the initial Covid restrictions) before bouncing back … but only rebounded to $2.3 billion in Q2 of 2021.

Then came China’s next set of rolling restrictions, which got even more severe—so much so that by Q3 of last year, Macau’s gaming revenue had fallen all the way back to $600 million, amounting to just 11% of what was seen in the comparable quarter of 2019! And it wasn’t like people were visiting but weren’t gambling—in fact, Q3 of last year saw just 900,000 Macau visitors compared to 9.9 million three years before (pre-virus)!

That leads us to Las Vegas Sands (LVS), which, despite its name, is now solely focused on Asia—it sold off its Vegas properties for $6 billion and operates a handful of locations in Macau (non-gaming revenue like malls, food/beverage and rooms made up more than a third of the total in Q3) that are plodding through life. As you’d expect, business has been sour—EBITDA from its China operations came in at negative $152 million in Q3, but that was actually better than Q3 2020 (-$233 million) and, given the obliteration of travel, doesn’t seem all bad.

By comparison, these hotel resorts saw cash flow of $755 million in Q3 2019, and while it probably won’t get back up there in the near future, it shows you the potential should things return toward normal.

But Sands is actually about much more than China—even before the virus, one-third of its profits came from Singapore, where it operates one of the country’s two casino resorts. The story is the same there, though far less extreme, with travel to the nearest airport now at 56% of comparable 2019 levels, up significantly from earlier this year. Interestingly, despite the decline in air travel, business there is very good, with the area’s gaming revenue about even with pre-pandemic levels, and for Sands’ operation, EBITDA was a solid $343 million, down “only” 21% from 2019 data.

Interestingly, the company is still in expansion mode despite the recent hiccups: Next year capital expenditures are anticipated to be nearly $1.5 billion, focused mostly on a big expansion and renovation of its Singapore operations.

All told, the story here is about a firm that’s surviving (actually EBITDA positive) even under very tough circumstances—and if China’s reopening momentum holds, there’s little doubt business will boom back toward prior levels, which should keep buyers interested in the months ahead.

The stock was around 74 before the virus clobbered the world—by May of last year, it was down to 28, pulled down by business and, of course, the bear market itself. Really, though, that was the start of a messy bottoming process, with a rally into the 40 area and some wild volatility after that, with reopening hopes rising and falling in quick order. But since late October, shares have changed character, rallying nicely and, last week, popping above the 50 area on decent volume.

Buy on dips, as long as the stock doesn’t fall below recent support at 46.

Current Recommendations

Changes Since Last Week’s Issue:

Enphase Energy (ENPH) Moves from Hold to Sell

Only one change this week, and it’s a surprising one: We’re selling Enphase Energy (ENPH), our best-performing stock of 2022. A month ago, such a move would have seemed preposterous, but in that month, ENPH has fallen a whopping 27%, losing roughly 100 points. It was enough to prompt Mike, who originally recommended it, to sell the stock last week, and we’ll follow suit in part because ENPH suddenly sticks out like a sore thumb: It was the only stock in our portfolio to lose substantial ground last week. Most of our other positions are acting well, a few of them quite well: Both Ulta Beauty (ULTA) and Xponential Fitness (XPOF) are at all-time highs!

Here’s what’s happening with all our stocks one week into the new year.

Updates

Arcos Dorados (ARCO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, is down slightly since we last wrote, though it remains in its standard 7.8-8.3 range. Bruce sold ARCO shares last week because they were on the cusp of his 8.50 price target. But we’ll keep it at Buy. Bruce maintained that there’s a lot to like here: “Our decision is not based on the company’s fundamentals (they remain impressively strong, the leadership is high quality, and its McDonald’s franchise is among the best-positioned and highest-value in the world), but rather on the risk/return profile embedded in the current share price.

“Since our initial recommendation in April 2021, the shares have produced approximately a 51% total return compared to a negative (-6%) total return for the S&P 500 over this period.”

That’s an impressive track record. And because this isn’t strictly a value portfolio, we’ll hang on to it, anticipating that the stock could rise higher than 8.50 – perhaps much higher – if the market gets going. BUY

BioMarin Pharmaceutical Inc. (BMRN), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is threatening to break through resistance at 108, trading just above that level this morning. The stock is up 6% since we last wrote and could be on the cusp of a breakout if it can close above 108 today. We’ll see. Mike recommended the stock as a potential new leader in the biotech space. BUY

Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, had a nice bounce-back week, jumping to 34 from 31. The bounce is encouraging, particularly given the recent weakness in renewable energy stocks. Centrus Energy is a nuclear fuel supplier for utilities in the U.S. and abroad. 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

Chewy (CHWY), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was up to 38 from 35 in its first week in the portfolio, extending its late-2022 run into 2023. As Tyler wrote in this space last week, “Chewy 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.” BUY

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, keeps holding in the 47-48 area. In his latest update, Bruce wrote, “Cisco may, at the margin, be negatively impacted by changes in Federal income tax laws that took effect on January 1. IRS rules previously allowed businesses to deduct 100% of the cost of new equipment under the ‘bonus depreciation’ rule. This rule is primarily designed to help small and medium-sized businesses. Starting this year, the bonus deprecation rate is reduced to 80%, then ramps down to zero starting in 2027. Some of Cisco’s customers may have increased their tech purchases last year in advance of the phase-out, which may at the margin reduce Cisco’s 2023 revenues.

“CSCO shares rose 1% for the week and have 38% upside to our 66 price target. The valuation is attractive at 9.4x EV/EBITDA and 13.5x 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, finally broke out of its 34-36 range last Friday, rising to nearly 38 – its highest point since August. The promotion of former Goldman Sachs executive Jason Armstrong to Chief Financial Officer may have helped finally push CMCSA shares over the top. But there’s more to Comcast’s recent mini-surge than that. In his latest update, Bruce wrote, “Total North American box office revenue in 2022 was weak, at $7.2 billion, compared to a typical pre-pandemic year of $11 billion. Growing popularity of streaming services, some lingering Covid concerns and a lack of supply of high-demand movies weighed on 2022 revenues.

“Comcast’s Universal Studios had a relatively good year, earning the #2 rank with $1.6 billion in domestic revenues. The company held the top spot for a number of releases, at 36. ‘Jurassic World: Dominion’ and ‘Minions: The Rise of Gru’ were notable winners for Universal Studios. Disney held the top ranking with $1.8 billion in domestic revenues.

“The industry’s 2023 outlook is encouraging. Better structured shooting and production schedules, an improved roster of movies, a normalized release cadence and lower Covid concerns should bring better revenues to the industry and Universal Studios.

“Comcast shares were recommended in several publications including Barron’s as a strong stock for 2023. We appreciate the support.

“Comcast shares … have 11% 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, bounced off support at 58, rising back above 60. So, we’ll keep holding it. According to Carl, this DowDuPont agricultural spinoff “has 82% of its shares in the hands of institutional owners.” That bodes well going forward for a stock that is already up 26% in the last year. The appeal of Corteva is that it uses emerging technology to help farmers improve crop yields and boost output. HOLD

Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was our single best-performing stock in 2022. But it’s in a total free fall now, falling 100 points in barely more than a month, and it’s time to sell while we still have a decent-sized (18-19%) gain on the stock. In fact, Mike just sold it himself last week. Here was his rationale: “Enphase Energy (ENPH) started to pull back a few weeks ago and got hit further when the solar group took on some water—but it’s just kept on sliding even on light-volume holiday trading, all the way to its 200-day line. Yes, we like the story, and we doubt ENPH is about to get gutted another 25% or 30% from here, but (a) we’re hunting for stocks that are growing more resilient over time, not showing fresh weakness, and (b) more importantly, the stock is toying with our loss limit. We do think ENPH could bounce here, maybe on some re-rotation into solar stocks for a few days, so if you want to give it a bit more rope (assuming you have tons of cash), that’s fine. But, while disappointing, we’re going to cut bait on our half position as the persistent weakness and our loss has us taking action to make sure a bad situation doesn’t get worse.”

Fortunately, we got in later than Mike, so we don’t have anything close to a loss. You could hang on to it if you want, in the hopes of a bounce for solar stocks. But I’m going to cut it from the portfolio and make room for stocks that aren’t sliding so dramatically. ENPH did a very nice job for us, but the momentum has vanished and now it’s time to move on. SELL

Green Thumb Industries (GTBIF), originally recommended by Tim Lutts and then Michael Brush in the Sector Xpress Cannabis Advisor, has held mostly firm since last week, an encouraging sign on the heels of its precipitous December nosedive. At some point, the cannabis sector – still growing rapidly, but whose stocks have lost more than 80% of their value in the last two years – is going to explode. It may take an act of Congress, like the passing of the SAFE Banking Act, or simply could get a boost once the broad market gets going. Regardless, there’s enormous upside in this sector, and Green Thumb is one of the industry leaders. We have a 20%-plus loss on the stock, but we’ll hang on to GTBIF as long as it doesn’t dip below 8. HOLD

Kinross Gold (KGC), originally recommended by Clif Droke in his Sector Xpress Gold & Metals Advisor, has finally broken free of its 3.95 to 4.38 range, rising to 4.58 as of this writing. We’ve been saying a break higher could be coming if the market makes a push, and that happened last Friday and continued today. This gold stock, which also boasts a 2.7% dividend yield, is a strong buy right now if you don’t already own it. 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 three weeks. A breakout could be forthcoming, especially if the market can build on its strong last couple trading days. In his latest update, Tom wrote, “True, NEE has leveled off over the past several weeks. But it also held strong in a very weak market. Defense is back. There’s something about a looming recession that turns investors toward the safest stocks. That’s why utilities were the second-best-performing market sector in 2022 and the best-performing over the last month. NEE is strong going into a period of historical outperformance for the stock.” BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in his Cabot Explorer advisory, kept climbing in its second week in the portfolio, from 136 to 138. There was no news. In his latest update, Carl wrote, “Novo Nordisk 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 people are currently living with obesity and that this is up a multiple of 3X since 1975. In summary, based on sizable and growing demand for this weight-loss drug, this well-managed, highly profitable company with an excellent growth profile and potential to develop new products has limited risk.” BUY

Realty Income (O), originally recommended by Tom Hutchinson in Cabot Dividend Investor, is still in the 61–65 range it’s been in for the past two-plus months. In his latest update, Tom wrote, “The legendary income REIT held up remarkably well in the latest round of selling, which took down just about everything else. Yeah, O had a negative single-digit return for 2022. But the REIT sector was down about 30% for the year. Investors appear to be appreciating a defensive and legendary income stock amid the current uncertainties. I expect more of the same in the early part of this 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, had a rare good week, bouncing to 121 after hitting a new closing low of 108 last Tuesday. However, all of those gains have come in the last two trading days, on no real news – just rising along with the market – so let’s not get too excited. There have been several false starts with TSLA of late. The real potential catalyst comes on January 25, when the company reports fourth-quarter 2022 earnings. If the stock is higher a week from now, then it’s possible the worst is over. Stay tuned. HOLD

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has replaced (just sold) Enphase Energy as our star performer! Shares of the beauty product retailer have risen to new all-time highs, eclipsing the previous high of 481 almost exactly a month ago. During that month, shares fell nearly 9%, only to swiftly recover those losses and reach even greater heights on modest market movement. That’s the sign of a great stock! BUY

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is trading at the very top of its 34–37 range. A move to 38 would be bullish. 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, just broke to new all-time highs in a big way. After toiling in a tight range between 21 and 22 for two months, the stock has gapped up to 25 in the last three trading sessions. There was no substantial news for this leading franchisor of boutique fitness studios. Up about 38% since we recommended it in late September, XPOF has emerged as one of this portfolio’s top performers. BUY

The next Cabot Stock of the Week issue will be published on January 17, 2023.