Cabot Stock of the Week Issue: July 1, 2024

Quick housekeeping note before we get started: I will be on vacation with my family next Monday, July 8, so you will receive your next issue the following day, on Tuesday, July 9. Happy Fourth of July!

Now, on to the market….

It was a very constructive first half of 2024. Both the S&P 500 and the Nasdaq reached new all-time highs, up 14.5% and 18.1%, respectively. But the performance was extremely top-heavy, with Nvidia (NVDA), Microsoft (MSFT), Amazon (AMZN) and other mega-cap tech stocks carrying a large load, dragging hundreds of underperformers with them. A more accurate gauge of what most investors are feeling is probably the Dow, which was up a mere 3.8% in the first half, or the Equal Weight S&P 500, up 4.1%. Those modest returns are perhaps more representative of how the average portfolio performed through the first six months.

So, we’ve leaned into what’s working on Wall Street, and our portfolio is better for it. We’ve been heavy on mega-cap tech (MSFT, NFLX, TSLA), artificial intelligence plays (AVGO, QCOM, SMCI), and the two weight-loss drug stalwarts (LLY, NVO) that have doubled since we recommended them. Even in a full-on bull market, it’s been a bit of a stock picker’s environment, especially since the late-March top after five straight up months (both the Dow and the Equal Weight index are down since then). Fortunately, we have a stable of great stock pickers here at Cabot.

So this week, we have a new pick from Mike Cintolo, from his Cabot Top Ten Trader portfolio. With the market winds potentially shifting away from mega-cap tech and AI, at least to a degree, in the second half of the year, we’ll shift with them and spread the wealth to other sectors. This week it’s to retail, which may seem like an odd choice given that retail sales have slowed to a crawl in the U.S. in recent months. But that has not been the case with discount stores, as consumers feeling the pinch of inflation and high interest rates are shifting to lower-cost options to do their shopping.

This week’s stock pick is one of them. Here it is, with Mike’s latest thoughts.

Ollie’s Bargain Outlet (OLLI)

Ollie’s is one of the nation’s largest retailers of closeout merchandise and excess inventory, selling everything from food, housewares, cleaning supplies, clothing, toys and much more, offering discounts of up to 70% compared to fancier store prices. That’s a strong selling point in the wake of tighter budgets as inflation has struck and as price hikes continue to linger in some categories, and this was made clear in the company’s Q1 earnings, which saw cash-strapped shoppers taking advantage of Ollie’s many bargains. Revenue of $509 million rose 11% from a year ago, thanks in part to a 3% comparable-store sales increase, while earnings of 73 cents lifted 49% (and beat estimates by eight cents). Adjusted EBITDA increased 40%, to $69 million, while margins and expenses were better than expected. The company attributed the solid results to consumers remaining “under pressure,” while also “seeking value in their purchases.” The cookie-cutter story here is also vital, with Ollie’s opening four new outlets in the quarter and ending Q1 with a total of 516 stores across 30 states (up 8%), with the top brass thinking it has room for 1,300 down the road. Interestingly, it just purchased 11 stores from the bankrupt 99 Cent Only Stores chain in key markets at what management regards as a bargain $15 million—and which analysts see boosting Ollie’s expansion potential. And there could be more opportunities to buy on the cheap going forward, as peer Big Lots not only plans on closing stores across several states this year but could be heading into Chapter 11 eventually, which would cut competition and add opportunities for expansion, too. Overall, growth here isn’t going to be lightning fast, but after some hiccups in past years, big investors see steady expansion ahead: Ollie’s raised its full-year comp sales outlook to around 2%, up from 1% previously, which combined with the store count expansion, should result in 8% to 11% top-line and slightly faster bottom-line growth through 2025—and likely for many years after that, too.

As for the stock, OLLI was hitting new multi-year highs last fall before hitting its head against a ceiling in the low 80s, leading to a prolonged trading range—shares bobbed between the upper 60s and low 80s from that point through mid-May. But shares got a head of steam going from there, briefly tagged new highs after earnings to start June and, after one more dip, took off strongly in recent sessions on excellent volume (bolstered by some positive analyst commentary). We’ll set our buy range down a bit, looking to grab shares on a normal exhale.

Current Recommendations

Changes Since Last Week:
PulteGroup (PHM) Moves from Buy to Hold

Only one downgrade this week, as PulteGroup is on thin ice, along with a couple other stocks we’ve already downgraded to Hold in recent weeks. The addition of Ollie’s Bargain Outlet (OLLI) brings our portfolio back up to 27 stocks, so I’d like to do some selling in the coming weeks, but again, I won’t force it and will let the market dictate which relative laggards need to go.

Fortunately, most of our stocks are holding up well, though a bit of malaise has set in as the market has stagnated in recent weeks. There are several standouts, however, including old friend Tesla (TSLA), which is showing signs of life for the first time in months.

Let’s dig into it!

Updates

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, held support just below 20, which means we’ll hang in there with this retail turnaround. It’s gotten battered and bruised the last three months as U.S. retail sales have slowed to a crawl, up a mere 0.1% in May and revised downward in April. But American Eagle is still on track for a solid year (2.9% sales growth, 17% earnings growth projected), and we have a 19% gain on the stock in eight months, so as long as it holds above 19.8, it will remain in the portfolio. HOLD

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, was flat again this week on no news. AVVIY has remained in the low to mid-12s since flirting with new highs above 12.7 last month. Any break above that level would be bullish. Shares of this U.K.-based life insurance and investment management firm remain cheap, trading at less than 12x earnings estimates, with a price-to-sales ratio of 0.40. Shares have 13% upside to our 14 price target. The 6.9% dividend yield adds to our strong total return thus far. BUY

BellRing Brands, Inc. (BRBR), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up another dollar, from 57 to 58, and is off to a fast start since we added it to the portfolio two weeks ago. BellRing is a mid-cap protein-focused packaged food company that sells two groups of products: ready-to-drink (RTD) protein shakes under the Premier Protein brand (83% of 203 revenue) and protein powders under the Dymatize brand (14% of revenue). It’s growing fast, with sales up 21% in 2023 and earnings per share up 14%. Those numbers were even better in the second quarter, up 28% and 88%, respectively.

As Tyler noted, “The company is boosting production to better fill demand and marketing investments, combined with an anticipated price increase toward the end of the year, should keep revenue, EPS and margins all trending in the right direction. For 2024, we’ll look for revenue to grow by at least 18% to $1.97 billion. EPS should be up 34% to $1.77, or better.

“As a final sweetener, there’s been some chatter about BellRing being a potential acquisition target. I can get on board with that.” BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, dipped slightly to 124. It’s a Bull Market Stock (Mike’s term) that tends to outperform the S&P 500 during bull markets, and we’re still in a bull market, so it’s worth keeping in the portfolio for now. But it’s down 5.4% year to date after a massive run-up last November and December when the rally was humming. A similar upleg in the market would likely precipitate another big run in BX, so I’ll keep it at Buy, especially since it appears to have bottomed a month ago. Earnings are due out in a few weeks, which loom as another potential near-term catalyst. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, had a welcome week of quiet after advancing 27% two weeks ago and giving back 12% last week. Here’s how Tom put it, in his latest update: “The AI gods giveth and taketh away, but mostly giveth. It’s been a wild June. At the close on June 17, AVGO was up more than 37% for the month. It has since fallen over 12% in just the last week. But it is still up 20% for this month. Broadcom reported earnings that blew away revenue expectations with a 43% increase over last year and announced a 10-for-1 stock split, effective on July 15. These kinds of swings are typical of a strong bull market such as we are seeing in AI stocks. Things are still very good, just not quite as good as they seemed last week.” HOLD

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, has settled into a narrow range between 90 and 93 over the last 10 days. Here are Mike’s latest thoughts on the stock: “CAVA is definitely stronger than most stocks out there—it’s been holding north of its 25-day line for weeks—though it too has seen selling on strength (95 has been a tough nut to crack) ever since news broke that closely-held shares were up for sale a few weeks back. There is risk here given the stock’s big run so far this year … but it’s also a bull market, and Cava strikes us as rare merchandise, with Mediterranean one of the fastest growing (but also underserved) restaurant categories out there, and with proven management that’s danced this jig before. Put it together and big investors are still likely looking to build positions given the huge runway of growth ahead. We’ll stay on Buy, though further wobbles given the market environment are possible near-term.” BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, has been similarly rangebound, ping-ponging between 377 and 390 since making a big splash at the beginning of June when it exploded upward from 305. In his latest update, Mike wrote, “CRWD officially was added to the S&P 500 this week, and so far the stock has held up just fine, not standing too far off new high ground. At a conference earlier this month, the firm’s CEO had a Q&A session with analysts and he revealed and reiterated some interesting tidbits: 15 of the top 20 banks in the world are clients; the number of customers using eight or more products rose 95% in the latest quarter (indeed, the CEO went on about how the firm’s platform is enabling huge growth as clients take more and more products after their initial buy); and CrowdStrike is rapidly penetrating downstream, too, with its Falcon Go offering giving small businesses an easy antivirus/malware solution for just $5 per month per device (it’s rare to dominate with big firms but also have offerings appeal to the small fry, too). Big picture, our view that CRWD is an emerging blue chip and one of the liquid leaders of the bull move has proven correct—and if the market was super strong here, we’d have it rated Buy. But given the environment out there, the near-term is more of a coin flip, so we’ll stay on Hold a bit longer and see how the action post-S&P addition plays out for a few more days.” We’ll keep CRWD at Hold as well, sitting on our 133% gain in 10 months. HOLD

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, just keeps rising to new highs, breaching the 900 level for the first time ever this week! Shares of this mega-cap biopharma sensation are now up 25% in the last two months, thanks mostly to the popularity of its weight-loss drugs. But there’s more to the story, as Tom writes: “It’s another new day and another new high. I don’t know what to say about LLY anymore. This superstar pharmaceutical company stock is up 56% YTD. The catalyst this time is good news from its Alzheimer’s drug donanemab. The drug got a very favorable report from the FDA Panel which has a huge input on whether a drug is approved or not. The report was practically a rave. Between the need for the drug, the prior approval of Novo Nordisk’s (NVO) inferior drug, and the panel nod, it is now a near certainty the drug will gain FDA approval, and probably soon.” We now have a 175% gain on this stock in just over 15 months. If you have not yet taken some profits, I recommend doing so now, with the stock having gone nowhere but up for two months. Officially, however, our rating is still a Buy. BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, got back a point after a modest drop from 142 to 138 two weeks ago. The big news is that it has now officially joined the S&P 500, as of June 24 (along with CrowdStrike, see above). Tyler calls this stock a “behind-the-scenes AI play” thanks to its launch of Airo, an AI-powered solution to help companies and creators build websites, late last year. GDDY shares have soared since, though they mostly hit the pause button in June. A break above 142 would be quite bullish. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, appears to have bottomed, at least in the short term, as the stock has bounced from just below 11 a share to just above 12 in the last month. In his latest update, Michael wrote, “Green Thumb will open a Rise cannabis store in Florida in late July, taking its total store count in the state to 17. One of the qualities I look for in cannabis companies is positioning in states ahead of expected legalization or expected expansion to recreational use from medical use. Florida voters may approve recreational-use sales in a referendum this November. Green Thumb, which sells cannabis under the RHYTHM and Dogwalkers brands, now has 94 stores nationwide.” There’s a lot to like for when the cannabis sector rally resumes. HOLD

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, had a very good week, up nearly 4% to advance to new all-time highs. There was no obvious new driving shares. The maker of the da Vinci robotic surgical system is coming off a strong earnings report in late April and received approval for its new da Vinci 5 system in March. Though full-scale launch won’t come until possibly next year, it’s a potential game changer for the company, and investors have taken notice, pushing ISRG shares up 32% this year. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, was up a point, from 49 to 50, which is newsworthy since it had been stuck on 49 for most of June. There was no news. This business development company pays a monthly dividend, and it’s been a steadying force in our portfolio. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, has been on a tear of late, rising from 415 to record highs above 450 in July on the resurgence in artificial intelligence fever on Wall Street. Microsoft’s artificial intelligence leadership position has made believers out of Wall Street, including Oppenheimer analyst Timothy Horan, who recently raised his price target on the stock to 500, saying that its partnership with ChatGPT creator OpenAI has helped create the “premier AI platform.” “We see this as a positive and sustainable partnership, which gives OpenAI access to the best AI infrastructure, critical data, and funding, and Microsoft exclusivity to the best AI model,” he said in a client note. Microsoft’s partnership with OpenAI and its industry-best large language models are a major reason why shares have nearly doubled since the start of 2023, and why MSFT should be part of any long-term portfolio. BUY

Neo Performance Materials (NOPMF), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has been mostly hovering around the 6 level, quickly recovering from a brief mini-dip to the mid-5s. An upgrade from metals firm Stifel had a hand in the quick recovery. It’s a little-known, small-cap rare earth stock with a lot of cash, low debt, and gaining in importance as rare earth prices start to rise again. BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, has been essentially flat for the last two weeks as the market as a whole has stalled. There’s been no major news of late, but the company is still riding momentum from a very strong quarter (sales up 14.8%; EPS up 78.7%). Netflix continues to assert its dominance as the top video streaming service in the world. Like MSFT, it’s a long-term buy for any portfolio. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, has been on a rollercoaster ride in the past week but was virtually unmoved in the aggregate. The stock briefly touched new highs near 147 before pulling back to 143. In his latest update, Carl wrote, “Novo Nordisk (NVO) shares ticked up this week as the U.S. House Ways and Means Committee may soon vote on whether Medicare will cover the costs of anti-obesity drugs. A Wegovy prescription costs about $1,349 per month in the U.S., while it costs just $140 in Germany and $92 in the U.K. Novo Nordisk’s Ozempic product carries similar markups. Novo also announced plans to invest $4.1 billion in another U.S. factory to meet the demand of its biggest market.” Demand for Ozempic and Wegovy is already sky-high, which is why this stock has more than doubled since we added it to the portfolio 18 months ago. This is a core holding that, like fellow GLP-1 star Eli Lilly, has plenty more long-term upside. BUY

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, was flat at 39 after falling from 44 the previous couple weeks. Hopefully it has found a bottom. Here’s what Mike had to say about it: “ONON has been all quiet on the news front, but that hasn’t prevented the stock from getting caught up in the market’s surf—following its nice breakout and upside follow through, shares have been hit relatively hard, slipping six points from their highs. So far, it’s acceptable action, and par for the course given the up-and-down environment out there; shares are north of their 50-day line and their breakout level. That said, our antennae are up, as a decisive break into the low to mid-30s could actually have us cutting bait, though a strong rebound off this support area would be a great sign that the fresh uptrend has legs. Overall, we remain optimistic because the evidence (overall chart, fundamentals) is encouraging—hold on if you own some, and if not, we’re OK starting a position here, though stay flexible in case the stock’s character changes.” BUY

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, was down from 113 to 110 this week and has pulled back from highs above 122 in the middle of May. Why? Here’s Mike: “We’ve given a lot of thought to PHM this week, and we have two competing views. On one hand, big picture, the stock’s rest period since March isn’t abnormal, and given the long-term fundamentals here (huge housing shortage, elevated prices, a likely easier Fed coming up) and the rare power seen late last year, the next big move is probably up. (The 40-week line, which is at 102 and slowly advancing, could kickstart the advance eventually, as it did last October.) On the other hand, though, this is the longest stalling-out period PHM (and the group) has seen since its major low in 2022—and it’s coming as Treasury rates have actually backed off and as the odds of a Fed rate cut (or cuts) this year have grown. Right here, the higher-high, higher-low pattern of the stock during the past few months is intact, so we’re hanging on, but while we’re OK giving PHM a couple of points to find its footing, any major selling from here would raise the odds of a more meaningful top. We’re holding but watching closely.” Let’s downgrade to Hold as well, until the stock can demonstrate some sustained momentum again. MOVE FROM BUY TO HOLD

Qualcomm, Inc. (QCOM), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was flat around 200 this week after a steep fall from 227 the previous week. It was dragged down with other AI stocks, including Nvidia (NVDA), though it appears to be stabilizing. In his latest update, Tom wrote, “It’s been a rough week of comeuppance for the mighty AI stocks. QCOM soared 39% from May 1 to June 18. But it has fallen 15% in the past week alone. Not to worry, it’s still up over 10% in June. The recent stock performance reflects profit taking in the AI space after a big surge from the last round of earnings reports. But QCOM should continue to deliver as several analysts see a major smartphone upgrade cycle for AI next year. Qualcomm is at the leading edge of chips that enable AI for smartphones and should benefit mightily.” We still have an excellent gain on the stock despite the recent drop-off. Could be a good entry point for those who missed the boat earlier. BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was down more than 4% on Friday after an analyst downgrade. JPMorgan downgraded its SE rating from a “positive overweight” to a neutral and lowered its price target to 78 from 84, citing increased competition in the e-commerce space, where Sea Limited’s Shopee business dominates in Southeast Asia. Pinduoduo’s Temu platform is growing in popularity and has emerged as a serious rival. Fortunately, Shopee is just one of Sea’s three core businesses, along with SeaMoney (fintech) and Garena (online gaming), which has a massive user base of nearly 600 million. There’s still a lot to like here, and JPMorgan’s concerns are more theoretical at this point – Shopee’s sales have accelerated in the last two quarters. So, with the stock trading at just a fraction of its late-2021 highs, I think shares have plenty more room to run, and this mini-selloff represents a buying opportunity in one of Southeast Asia’s fastest-growing companies. BUY

Super Micro Computer (SMCI), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was flat last week despite a very bad day (-8%) on Friday. There was no obvious reason as to why, aside from the AI story losing momentum, at least in the short term. As Carl noted, “The company is expected to boost revenue this quarter by 142%, according to Investor’s Business Daily analysis of data from S&P Global Market Intelligence. Meanwhile, the company recently announced it was adding three new manufacturing facilities to meet increased demand from its clients. This aggressive stock is at the heart of the AI boom.” So, we’ll keep it at Buy despite the recent weakness. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is starting to show signs of life, breaking above 180 after months spent in the 170s, and now advancing to the doorstep of 200 for the first time since early March. Let’s see if it meets resistance there, as it has several times since. There was no major news, and the real catalyst doesn’t arrive until later this month when the company reports earnings. But, with Elon Musk’s tedious compensation squabble in the rear-view mirror (for now), there’s some good vibes around the company for the first time in a while. Earnings will put that to the test. HOLD

Uber Technologies (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, added another couple points as it continues to recover from three solid months of selling and/or stasis. In his latest update, Mike wrote, “There have been worries surrounding Tesla’s Robotaxi reveal in early August and rising labor costs in some states (giving gig workers more benefits, etc.), but it’s starting to look like a lot of that been discounted by UBER’s March-May decline. More than likely, whether the stock’s correction will give way to a new advance will come down to the Q2 report (likely out in late July); a better-than-expected second-half outlook could refocus investors on the firm’s huge EBITDA and free cash flow story that should continue to ramp for many years ahead as rides, delivery and ancillary businesses like advertising do the same. As for the here and now, UBER is up four weeks in a row off its lows and is holding north of its 50-day line—a good first step, though we need to see more to conclude the path of least resistance has turned up.” We’ll stay on Hold as well, but the trend is encouraging. HOLD

United Airlines (UAL), originally recommended by yours truly in the Growth/Income Portfolio of Cabot Value Investor, has been in the 48-49 range for the past couple weeks since falling from highs near 55. There was no major news. Earnings are due out in a couple weeks, on July 17, which could re-spark the stock if they’re good enough. Regardless, UAL shares remain dirt cheap at less than 5x earnings; with 7.3% revenue growth forecast this year, I think that’s a good recipe for a turnaround. BUY

UnitedHealth Group Inc (UNH), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was up 4% this week, with all of the gains coming on Friday on no company-specific news. In his latest update, Tom wrote, “The stock reversed its negative course after earnings put fears about the hacking to rest. UnitedHealth reported earnings last month that soundly beat expectations with an 8.6% revenue rise and a better than 10% increase in adjusted earnings from last year’s quarter. The company also issued strong guidance. The stock rose about 20% after the report but has since given some back. The stock was under pressure early this month after management raised a red flag about Medicare reimbursement rates, but the stock has regained its footing since.” BUY

United States Steel Corporation (X), originally recommended by Matt Warder in his Cabot Turnaround Letter, had a strong first week in the portfolio, up more than 4%. Part of the premise here is that there’s a very near-term catalyst for a turnaround, as Japan’s Nippon Steel is attempting to acquire it. Matt provided the latest on where the deal stands: “U.S. Steel (X) addressed concerns brought by an activist shareholder of potential acquirer Nippon Steel saying the takeover would increase decarbonization costs. The company is in the process of ramping up recycling facility Big River Steel which will replace a portion of traditional, carbon-intensive blast furnace capacity.” So far, so good. U.S. Steel is a Buy, and you might want to do so quick before Nippon Steel swoops in and buys it. 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 July 9, 2024.

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