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Cabot Stock of the Week Issue: July 10, 2023

Volatility has resurfaced and stocks have pulled back a bit of late, though it’s still very much a bull market. We’ll see whether this week’s CPI print (Wednesday) and kickoff to second-quarter earnings season (Friday) reverses or accelerates the recent mini-selloff. In the meantime, we’re going outside the box this week to add more exposure to the improving cannabis sector in the form of a leveraged fund. It’s been a favorite of Cabot Cannabis Investor Chief Analyst Michael Brush in recent weeks, and with Congress back in session today, the timing could be perfect.

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Since we just wrote to you three trading days ago, we’ll keep this week’s intro short and sweet.

The new bull market remains intact, but some cracks in the façade have emerged in the last week, as volatility has finally spiked (the VIX has risen from 13 to 15) while the S&P 500 appears headed for a fourth straight day of selling. The selling, however, has been modest and looks like normal action after the best first half of the year in four decades, at least in the case of the Nasdaq. Second-quarter earnings season gets underway this week, as some of the big banks report this Friday. Q2 results may play a pivotal role in where the market heads next, but before that, this Wednesday (July 12) we’ll get the latest inflation number. The Federal Reserve Bank of Cleveland expects the June CPI print to come in at 3.2% year over year, which would mark a significant decrease from 4% in May. Where the headline inflation number actually lands could go a long way in determining whether the Fed ends its mini-hiatus and raises rates again at the end of the month, as many now expect.

With a lot up in the air this week, we will go off the beaten path a bit and add more exposure to the beaten-down cannabis sector. Marijuana stocks have been ruthlessly sold off these last two years, but have been showing signs of life lately, which has been reflected in the resurgence of our lone cannabis holding, Green Thumb (GTBIF). Today, let’s add another cannabis position in the form of a timely leveraged fund (yes, another fund!) that has been the top recommendation of Cabot Cannabis Investor Chief Analyst Michael Brush of late.

Here it is, with Michael’s rationale.

AdvisorShares MSOS 2x Daily ETF (MSOX)

There is a potentially nice trading opportunity setting up in cannabis near-term.

When Washington, D.C. lawmakers return from their July 4th break on July 10, they are likely to get down to serious business on the SAFE Banking Act.

This proposed law would boost investor interest in the space because it would allow banks to work with cannabis companies. This would help cannabis companies in several ways.

Cannabis companies would no longer have to operate in cash only. They’d get cheaper access to financing. They’d have better access to vendors and business partners, and they could better attract management talent, notes Kim Rivers, CEO of Trulieve (TCNNF).

The bill may also include provisions that allow cannabis companies to more easily graduate to bigger stock exchanges from the over-the-counter exchange. This last benefit is more of a wild card.

Big picture, approval of the bill would be a watershed moment because it would be one of the first acknowledgments at the federal level that cannabis is a legitimate business, says Boris Jordan, founder chairman at Curaleaf (CURLF).

Here is more detail on what might play out in the next month, sparking a move up in the group. With lawmakers coming back from break today, the Senate banking committee is likely to mark up a SAFE banking bill that has been introduced simultaneously in the Senate and the House. Then they are likely to vote it out of committee before the August break, say cannabis lobbyists in Washington, D.C. After that, the bill will go to a vote in the full Senate sometime later this year. SAFE has filibuster-proof support in the Senate (at least 70 votes), believes Don Murphy, Director of Federal Policies at Marijuana Policy Project, an industry lobbying group.

The bill’s fate in the Republican-controlled House is less certain. But that won’t stop cannabis stocks from rallying in July on concrete signs of progress in the Senate on SAFE. The risk here is that Senators on the left try to load up the latest “clean” version of SAFE with “social justice” amendments that make it harder for Republicans to support the bill. This has sunk similar bills in the past. SAFE stands for the Secure and Fair Enforcement Act.

Here are some other potential July catalysts for cannabis.

* Maryland started recreational use sales on July 1. This is well known, and possibly priced into the stocks. Nevertheless, headlines around the event may attract investor interest.

* Some analysts think we could get a Florida Supreme Court decision in July on the wording of a proposed referendum that would allow Floridians to vote on legalizing recreational use in the 2024 elections.

Florida is a potentially big market given its population of 22 million and the 138 million tourist visits per year. Approval is probably not priced into cannabis stocks since the Florida Supreme Court has a conservative bent. Conservative politicians are aware that a cannabis referendum would bring out voters on the left.

Florida, where medical use is permitted, is currently a $2 billion annual revenue market. That would go up to $6 billion with the legalization of recreational use, believes Rivers at Trulieve, the biggest operator in the state. Trulieve has funded the referendum effort. Projections of a court decision in July could be premature, since the court has until the end of April 2024 to decide.

How to play a potential Senate-driven uptick in the cannabis industry? I personally favor AdvisorShares MSOS 2X Daily (MSOX). This is the leveraged version of the ETF MSOS. It theoretically goes up (and down) by twice as much as ETF AdvisorShares Pure US Cannabis (MSOS), though the relationship does not always hold exactly. Consider accumulating MSOX on weakness of 2%-4% or more, and keep it on a short leash depending on how Congress’ return impacts the cannabis sector this month. BUY

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Current Recommendations

Stock

Date Bought

Price Bought

Price on 7/5/23

Profit

Rating

AdvisorShares MSOS 2x Daily ETF (MSOX)

NEW

--

4

--%

Buy

Aviva plc (AVVIY)

6/21/23

10

10

-2%

Buy

Brookfield Infrastructure Corporation (BIPC)

5/23/23

47

45

-4%

Buy

BYD Company Limited (BYDDY)

4/25/23

57

66

18%

Buy

Comcast Corporation (CMCSA)

11/1/22

32

42

31%

Buy

DoubleVerify (DV)

6/13/23

36

39

6%

Buy

Eli Lilly and Company (LLY)

3/21/23

331

451

36%

Buy

Green Thumb Industries Inc. (GTBIF)

5/9/23

8

8

-2%

Buy

Kimberly-Clark de Mexico (KCDMY)

3/29/23

10

11

8%

Buy

Las Vegas Sands (LVS)

1/4/23

51

57

13%

Hold

Microsoft (MSFT)

3/7/23

256

330

29%

Buy

Novo Nordisk (NVO)

12/27/22

133

157

18%

Buy

ServiceNow (NOW)

6/6/23

559

563

1%

Buy

Shopify Inc. (SHOP)

6/27/23

64

62

-3%

Buy

Si-Bone (SIBN)

5/31/23

25

27

6%

Buy

Spotify (SPOT)

5/16/23

145

158

9%

Buy

Terex (TEX)

7/6/23

60

59

-2%

Buy

Tesla (TSLA)

12/29/11

2

268

14788%

Buy

Uber Technologies, Inc. (UBER)

2/14/23

34

43

25%

Buy

Wingstop (WING)

3/14/23

169

192

14%

Hold

WisdomTree Emerging Markets High Dividend Fund (DEM)

10/4/22

34

38

10%

Sell

Xponential Fitness, Inc. (XPOF)

9/27/22

--

--

--%

Sold

Changes Since Last Week: WisdomTree Emerging Markets High Dividend Fund (DEM) Moves from Buy to Sell

Well, we can’t very well have TWO ETFs in our stock-centric portfolio, can we?!

Actually, the addition of MSOX is not why we’re selling the WisdomTree Emerging Markets High Dividend Fund (DEM) – at a 10% profit – today. It’s simply because DEM was hired to do a job in the midst of a bear market: serve as a security blanket to protect against all the chilly 2022/early 2023 selling pressures. It did its job well, but now we’re in a new bull market, despite the recent mini-pullback, and DEM’s services are no longer needed. Plus, we’re again at max capacity, and something needed to go.

Here’s what’s happening with all our remaining stocks.

Updates

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, is down slightly since we last wrote. There was no news. Shares of this London-based life insurance and investment management company have 43% upside to Bruce’s 14 price target. BUY

Brookfield Infrastructure Corporation (BIPC), originally recommended by Tom Hutchinson in Cabot Income Advisor, are off marginally since we last wrote, on no news. Shares remain in the middle of their recent 44-47 range, and up 17% year to date. BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, hasn’t budged much since we last wrote. But the company got good news last week when it reported record second-quarter sales. In Q2, the company sold 703,561 vehicles, up 98% from the same quarter a year ago and 27.4% from the first quarter. Sales appear to be accelerating: The Chinese electric vehicle maker sold 253,046 vehicles in June alone. To keep up with booming demand, BYD is working on new production plants in Thailand and Vietnam and last month announced plans for a factory in Brazil. Indonesia and Europe are other potential future manufacturing sites. The geographically varied production sites reflect BYD’s desire to build a global brand that rivals Tesla.

While the stock is up 34% year to date and 50% since a November bottom, it’s still woefully undervalued given the accelerating growth. Shares trade at 30 times forward earnings – roughly half the value of Tesla – and just 1.5 times sales, which is especially low considering revenues more than tripled in 2022 and vehicle sales basically doubled in the second quarter.

In my view, BYDDY has the highest upside of any stock in our portfolio. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, is hitting yet another 2023 high this morning! There was no news. We are up more than 30% since adding this media giant to the portfolio last November. BUY

DoubleVerify (DV), originally recommended by Mike Cintolo in Cabot Growth Investor, is unchanged since we last wrote, which means it’s still hovering around all-time highs. In his latest update, Mike wrote, “DoubleVerify (DV) continues to act very well, coming down a bit this week but remaining within a few dimes of new closing highs. The firm has been quiet on the news front for the past couple of weeks (when it announced ad verification for Facebook and Instagram Reels), but we continue to think that big investors are taking stakes in this new industry—indeed, early data shows that 483 funds owned DV at the end of June, up from 410 and 364 in March and December, respectively. We’ll stay on Buy.” Naturally, we will too. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, dipped for the first time in a while, though not much more than the market. It’s down 2.8% since we last wrote. Having gone nowhere but up since late May, a bit of cooling off makes sense. We’re still sitting pretty with LLY, up more than 36% since adding the biopharma giant to the portfolio three and a half months ago. The recent pullback represents a nice chance to add to your position or start a new one if you haven’t already done so. BUY

Green Thumb Industries (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, has been chopping its way higher of late, rising 12% in the last two months along with most other cannabis stocks. It’s why we’ve decided to add more exposure to the sector with our MSOX addition today. The fact that it’s held its gains after last week’s big gap up – especially while other stocks have pulled in a bit – is a very bullish development. BUY

Kimberly-Clark de México (KCDMY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has been all over the map since we last wrote, first spiking to multi-year highs near 12 hours after we wrote last Wednesday, but since sagging back below its recent range in the mid-11s. There was no obvious reason for the volatile action, other than a surge in general market volatility in the last week. KCDMY’s U.S. parent company, Kimberly-Clark, reports earnings in two weeks, on July 25. We’ll see how its Mexican counterpart behaves ahead of that report. BUY

Las Vegas Sands (LVS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is about right where it was when we last wrote, which means it’s at least temporarily stopped the bleeding after dipping below – but not far below – its recent 57-59 range. Earnings for this Macau-centric casino and gaming company are due out later this month. Big things are expected: Analysts are looking for 126% sales growth with EPS of $0.44, up from a 34 cents-per-share loss in the same quarter a year ago. So a potential big catalyst to give the shares another jolt is out there, especially if the company exceeds those lofty expectations. HOLD

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, is back near the lower end of its recent 328-348 range but hasn’t dipped below it. Earnings are due out in two weeks, on July 25. That will be yet another window into how much Microsoft’s leadership position in the artificial intelligence boom is boosting sales. Analysts are estimating 6.9% revenue growth and 14.3% EPS growth. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is down with the market in recent days, though still holding above support in the 155-156 range. Its two signature drugs – Ozempic (for Type 2 diabetes) and Wegovy (for obesity) – continue to sell like hotcakes. We have an 18% gain on the stock. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, has been holding steady of late. Earnings are due out July 26. Analysts expect 21% sales growth and 26% EPS growth for this cloud computing giant. BUY

Shopify Inc. (SHOP), originally recommended by Tyler Laundon in Cabot Early Opportunities, are down more than 4% since we last wrote. There was no news, so it appears the pullback is in sympathy with the market’s mini-retreat, and stocks with lots of meat on the bone following big run-ups like the one SHOP had in May and early June tend to get overly punished when the sellers are out. The stock remains an excellent big-cap play on the AI boom, which isn’t going anywhere. BUY

Si-Bone (SIBN), originally recommended by Tyler Laundon in Cabot Early Opportunities, is about even since we last wrote, though is down about 6% from its late-June highs. Still, we have about an 8% gain on the stock since adding it to the portfolio a little over a month ago. Si-Bone is a small-cap MedTech company that specializes in implants that solve issues of the SI joint and pelvis. Its addressable markets are worth about $3.7 billion. So far, over 80,000 procedures have been completed by more than 3,000 surgeons. The first quarter of 2023 was impressive. Revenue jumped 46% to $32.7 million, beating by $3.6 million. EPS of -$0.41 improved by 24%. The company had 950 active surgeons (+40%) in the U.S. and 3,500 procedures in the quarter (+48%). BUY

Spotify (SPOT), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, is down slightly with the market the last few days. There’s been no significant news, though TikTok’s entry into the music streaming business has some SPOT investors concerned, which may have played a small role in the recent selling. But such fears are merely theoretical at this point, especially given Spotify’s dominant position in the music and podcast streaming business. Earnings are due out July 25 and analysts are expecting big things: 20% revenue growth and narrowing profit losses. BUY

Terex (TEX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is down about a point since we added it to the portfolio last Wednesday. In case you missed it during last week’s holiday-abridged week, here is some of what Mike wrote about the stock: “The firm has some of the best-known brands in the world (45% of sales are from outside North America) that have made it a big beneficiary when the economy picks up—the difference this time around is that we’re seeing nearly unprecedented demand even as the economy is relatively slow and interest rates are high. Indeed, Terex’s business is as strong as it’s ever been: Sales growth has been accelerating (4%, 13%, 23%, 23%) while earnings have crushed expectations, with this year’s earnings estimate rising from $4.91 per share three months ago to $6 per share today (and likely headed higher when all is said and done).

“But more important is what comes next: Despite record results, the firm’s backlog actually rose 2% from the prior quarter (to $4.1 billion) thanks to strong bookings (over the past 12 months, bookings are the second highest in company history)—backlog for the materials processing segment stands at three times normal levels (!) while the aerial work platform backlog is at a new record. And the top brass thinks that low dealer inventories in the materials processing segment and an elevated age of the entire industry’s fleet should keep demand for its offerings strong.

“That means Terex could be getting into a situation that has been seen in many cyclical names over the past few years—earnings are currently booming, yes, but instead of it being a two- or three-quarter surge, it’s growing more likely that the bottom line could remain elevated for a long time to come … if not grow should some big-picture factors (like the Fed getting off the economy’s back) come into play. Right now, analysts see earnings north of $6 next year, too, and actually inching up after this year’s record.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has given back some of its recent gains, but nothing to be concerned about. The stock is still up 119% year to date and 65% just since the beginning of May. Earnings are due out next Wednesday, July 19, so those will likely determine if the stock keeps rising or if it hits the pause button for a while. Early indications have been encouraging: The company delivered 466,140 cars in the second quarter, about 10,000 more deliveries than the 455,925 analysts were expecting and an 83% improvement from the same quarter a year ago. Meanwhile, Tesla produced 479,700 new cars, marking the fifth quarter in a row of higher production numbers – a testament to the company’s increased manufacturing capacity thanks in part to its new plant in Austin, Texas.

We’ll get the full scope of the company’s second-quarter performance a little over a week from now. Analysts are looking for 45% revenue growth with 8% EPS growth. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, is down slightly of late, though still north of monthlong support above 42. In his latest update, Mike wrote, “Uber’s pullback continues, dipping to its 25-day line today like so many other growth titles. The stock has always been affected somewhat by the economic outlook, with fears of a slowdown, so further weakness is certainly possible, but the story, numbers and chart are all pointed higher here—if that changes (a meltdown into the 38 area, for instance), so will we, but we’re holding onto our shares and think new buyers can grab some around here.” BUY

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, is about even since we last wrote. It broke to 200 the week before only to pull back to its normal range. That has Mike eyeing the stock closely, as he wrote in his latest issue: “Wingstop (WING) rallied right into resistance near 200 and its 50-day line—and was soundly rejected, giving up most of its bounce. It’s getting close to the uncle point for WING: We’re holding here but it’s on a very tight leash.”

Not exactly a ringing endorsement, but with a 14% gain on the stock in four months and WING sitting comfortably above its 200-day moving average, we’ll hold tight as well. HOLD

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, finally broke above 40 for the first time in more than a year … only to pull right back to its traditional 37 to 39 range. This safe ETF with a high dividend yield and some of the highest-quality emerging market stocks in the world made sense as a veritable flotation device in a bear market, and it did its job, advancing 11% in a little over nine months. But now we’re in a bull market, and this fund no longer makes sense – it’s occupying a spot that would be better filled by a more growth-oriented title. So we say thank you very much, DEM, but it’s time we go our separate ways. MOVE FROM BUY TO SELL


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

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