Cabot Stock of the Week Issue: July 17, 2023

The bull market picked up even more steam last week, fueled by a lower-than-expected inflation number (3% in June) and a promising start to second-quarter earnings season from the big banks, especially JPMorgan. Of course, the next couple weeks could throw a bit of cold water on the rally, with the Fed still overwhelmingly expected to raise interest rates 25 basis points again and Q2 earnings among large caps expected to show a -7.1% decline, according to FactSet (though I’ll take the over). But I wouldn’t bet against this market right now, which is why today we’re taking another big swing on a small company with loads of potential.

It’s a little-known manufacturer of rare earths, dug up by Cabot Explorer Chief Analyst Carl Delfeld in his latest issue. Rare earths are key ingredients in just about every major (i.e., money-making) technology these days. And that was the impetus behind Carl’s recommendation of this small-cap Canadian stock.

Here it is, with Carl’s thoughts.

Neo Performance Materials Inc. (NOPMF)

As I have been predicting, the big news last week was China announcing plans to restrict exports of gallium and germanium, two critical metals used in semiconductors, defense technologies, and the renewable energy sector.

Beginning in August, Chinese sellers of these materials will have to apply for a dual-use export license from China’s Ministry of Commerce. That gives the Chinese government greater power on which foreign buyers can obtain the metals, and in what quantities.

China controls 98% of the world’s supply of gallium and 68% of the world’s germanium. Strict controls could hamper production of an array of items such as automobiles, fiber-optic cables, and many advanced defense systems.

This demonstrates China’s growing leverage as a supply chain and critical metals superpower, and the willingness to use this power to push back America and its other rivals.

The supply chain for commodities both rare and common goes from ore from the mine to the refinery, to metal making, and finally into the manufacturing of end products such as laptops and smartphones. China has a clear lead right down the line in almost all these areas.

Neo Performance Materials Inc. (NOPMF) manufactures the building blocks of many modern uses of these technologies and advanced industrial materials.

These include magnetic powders and magnets, specialty chemicals, metals, and alloys – all using rare earths and minerals critical to the performance of many important products and emerging technologies.

Based in Toronto, with offices in Denver, Singapore, and Beijing, the company is organized along three segments: Magnequench, Chemicals & Oxides, and Rare Metals.

Neo has a global platform that includes nine manufacturing facilities located in China, the United States, Germany, Canada, Estonia, and Thailand, as well as one dedicated research and development center in Singapore.

Neo Performance Materials announced last week that it has started construction of a manufacturing facility in Europe to produce rare earth permanent magnets, which are key for electric vehicles, wind turbines, and other products. Neo’s manufacturing facility in Narva, Estonia will be near its existing rare earth separation plant in Sillamäe, Estonia.

The development comes at a time when dependence on China for key materials and technologies has become a major issue for Western countries, with some countries ramping up support to boost domestic production of critical minerals including rare earths.

Rare earth permanent magnets are used in a wide variety of technologies that increase energy efficiency and reduce carbon dioxide emissions. These magnets are especially integral to the drivetrains of many electric vehicles manufactured, where they increase the power and efficiency of the motors.

Neo offers us an excellent hedge on China/Taiwan risk, a forward 4.5% dividend, and I like that insiders control about 20% of the outstanding stock. Shares are down about 5% year to date and trading at less than half their 2021 highs (17), but they appear to have bottomed in May and have climbed 10% in July alone, pushing above their 50-day moving average and closing in on the 200-day line. There’s momentum here, which makes this a good time to buy a half position in a beaten-down stock that has proven it has plenty of upside in the not-too-distant past.

Current Recommendations

Changes Since Last Week:
Green Thumb Industries (GTBIF) Moves from Buy to Hold
Wingstop (WING) Moves from Hold to Sell

Virtually every stock in the portfolio not associated with the cannabis industry is acting well, and about a third of them are hitting either 52-week or all-time highs. But given our 20-stock cap (which we may reassess – and possibly expand – in the coming weeks; stay tuned), something again needed to go, and like last week with DEM, we’ve decided to say goodbye to a holding that has produced solid but unspectacular returns and hasn’t budged much in recent weeks despite a bull market that’s picking up steam. Wingstop (WING) is the unfortunate laggard this time, and it’s been pretty good to us (15% gain), but I think we can do better going forward. Rallies like this one are when the true money is made, which means it’s time to swing for the fences rather than attempt to leg out infield singles like we were forced to do for basically all of 2022.

Here’s what’s happening with our lineup of aspiring Shohei Ohtanis and Aaron Judges.

Updates

AdvisorShares MSOS 2x Daily ETF (MSOX), originally recommended by Michael Brush in Cabot Cannabis Investor, didn’t exactly get off to a running start, nose-diving 14% in their first week in the portfolio. Michael says the slow start for cannabis stocks after Congress returned from hiatus wasn’t wholly unexpected, and that the second half of July could bring some meaningful action in D.C. – which could spark a rebound in cannabis stocks. Here’s what he wrote in his update last Wednesday: “In a letter outlining his near-term agenda, Senate majority leader Chuck Schumer (D-NY) says passing bank reform favoring the cannabis sector is a top priority.

“The letter to Senate colleagues confirms what lobbyists and cannabis company executives have been reiterating for the past several weeks: July could be a turning point for the group, offering legislative developments that push marijuana stocks much higher.

“This sets up cannabis as a potentially good short-term swing trade, but it also confirms the bullish long-term prospects for the group.

“Note that cannabis lobbyists target the second half of July for progress. This makes sense, since the Senate banking committee – expected to mark up a bank reform bill soon – has other matters it says it wants to take up first.

“So, the near-term weakness in the group could continue for a few days until news of progress hits the headlines later this month. My logic here is that cannabis investors are extremely fickle and trigger-happy. This is understandable, given how hard the sector has been hit in the past 10 months. But it also means cannabis investors and traders are extremely quick to sell if they buy expecting bullish news out of Washington, D.C. and then do not get instant gratification.”

Going off that prognostication, if you didn’t buy MSOX when we added it to the portfolio last week, the good news is you can get it now even cheaper. We’ll see if this Congressional session bears fruit for the cannabis sector. We will keep this fund on a very short leash, though. If July comes and goes without any action from Congress, we will likely quickly sever ties with MSOX. Let’s see what the next week or so brings. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, had a nice gap up last week on no news. Shares of this London-based life insurance and investment management company still have 38% upside to Bruce’s 14 price target. BUY

Brookfield Infrastructure Corporation (BIPC), originally recommended by Tom Hutchinson in Cabot Income Advisor, had a nice week, advancing about 4% on no news. However, shares remain in their recent 44-47 range. Any break above 48 would be quite bullish. BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, hasn’t budged much since we last wrote, although shares did get a temporary bump on Friday of last week when the company raised its six-month net profit forecast in a filing to the Shenzhen stock exchange. The company also submitted a $1 billion proposal to build electric vehicles and batteries in a proposed Indian facility in partnership with privately held Megha Engineering and Infrastructures.While details remain scant as the proposal is not yet public, the development is consistent with something we wrote about last week, namely, BYD’s desire to build a global brand that rivals Tesla.Shares remain (relatively) undervalued in the EV space and continue to have 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 about where it was last week after hitting new 2023 highs. In his latest update, Bruce wrote, “The company is changing some leadership within the NBCUniversal business. Mike Cavanagh, president of parent company Comcast (arguably the #2 executive behind chairman/CEO Brian Roberts), recently inherited the role of overseeing the NBCUniversal operations, as the former head was removed after inappropriate behavior. Cavanagh announced that he will not appoint a new head of NBCUniversal, rather, he will oversee it within his role as Comcast President. Cavanagh shuffled/promoted a few other NBCUniversal executives, perhaps to satisfy some who may have thought they were the heir apparent to the top NBCUniversal role. We see little chance of any major changes to the unit’s performance as a result of the changes but find it important to recognize that new people (veterans, to be sure) are running NBCUniversal.

“Comcast shares … have 10% upside to our 46 price target.” BUY

DoubleVerify (DV), originally recommended by Mike Cintolo in Cabot Growth Investor, spiked to new 52-week highs last week. In his latest update, Mike wrote, “DV has continued its cool, calm, collected trading, trading steadily since July began after a streak of eight straight up weeks to close out Q2. The stock caught an upgrade yesterday, with the analyst saying firms are wanting to optimize their digital ad spend, which is pushing them toward DoubleVerify. The next big event should be the Q2 report, which is due in two weeks (July 27), and where analysts see revenues up just over 20% and earnings of six cents per share. Bigger picture, we think the still-strong economy could goose ad placements (ad budgets are very economically sensitive), which should help the cause, though the firm’s story is bigger than that. We’ll stay on Buy.” So will we. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is down a bit since we last wrote, though it appears to have bounced off a short-term bottom at 434. The company’s clinical-stage drug candidate donanemab slowed Alzheimer’s by 60% for those in the early stages of the disease, the company reported. Also, the company is buying Versanis for $1.93 billion to strengthen its obesity portfolio. Those victories appear to have stabilized the stock after a down couple weeks. We still have a 35% gain in LLY in just four months. BUY

Green Thumb Industries (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, is down sharply along with the rest of the cannabis sector (see MSOX, above) in the last week, erasing slow-and-steady momentum from the previous six weeks. So far, however, it’s holding above June support, and well above its May lows. We will hold onto it for the potential late-July bounce in cannabis stocks, as theorized by Michael. If it doesn’t arrive, we may be saying goodbye to both MSOX and GTBIF. In the meantime, let’s downgrade to Hold, as the stock looks a bit volatile for new buys. MOVE FROM BUY TO HOLD

Kimberly-Clark de México (KCDMY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, had a very good week, gapping up to new 52-week highs! There was no company-specific news, although the improving environment for stocks and consumer sentiment in the U.S. likely both played a role. Its parent company, Kimberly-Clark (KMB), reports earnings next Tuesday, July 25. We now have a double-digit gain in KCDMY, which is a play on Mexico’s 25% manufacturing discount to the U.S. and China. BUY

Las Vegas Sands (LVS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up a couple points ahead of its earnings report this Wednesday, July 19. Big things are expected: Analysts are looking for 126% sales growth with EPS of $0.43, 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, bounced back nicely this week but remains in its recent 328-348 trading range. Next week’s earnings report (July 25) could be the thing to elicit another surge. Analysts are looking for 6.9% revenue growth and 14.3% EPS growth. Also, the company won its ongoing battle with the Federal Trade Commission (FTC) to buy gaming giant Activision Blizzard for $75 billion (the FTC was attempting to block the deal). The mega-deal could be completed in as little as six weeks. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is up about 2.5% since we last wrote, giving us a 21% gain on the stock. Its two signature drugs – Ozempic (for Type 2 diabetes) and Wegovy (for obesity) – continue to be big sellers. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, just broke out, advancing 5% in the last week. There was no news, though perhaps Wall Street knows something about the company’s earnings, set to be reported next week (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, is up 11% in the last week to hit new 52-week highs! There was no news, so the stock was likely riding the coattails of the big run-up in the market last week. The e-commerce giant is getting a boost from both improving consumer sentiment and the artificial intelligence boom. BUY

Si-Bone (SIBN), originally recommended by Tyler Laundon in Cabot Early Opportunities, is about even in the last week. We have about an 8% gain on the stock. 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. BUY

Spotify (SPOT), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, is the portfolio’s biggest gainer this week, rising nearly 13% to reach new 52-week highs! There was no company-specific news behind the move. Earnings are due out next Tuesday, July 25. BUY

Terex (TEX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is up about 6.5% in the last week to new all-time highs! There was no news, but shares of the well-diversified manufacturing company are having a solid year, up 47% year to date on the strength of accelerating revenues in recent quarters. With earnings per share growth of 40% expected this year, the stock nevertheless trades at a mere 11 times forward earnings. Offering a modest (1.1% yield) dividend to boot, this company has something for everyone. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is right back at new highs after a down week. The immediate catalyst is that the company finally produced its first Cybertruck, at its factory in Austin, four years after unveiling the prototype. No rollout plans were announced. The bigger news comes this Wednesday when the company reports second-quarter earnings. Analysts anticipate 45% revenue growth and 6.5% EPS growth. Anything short of, or perhaps even barely beating, those estimates might send shares tumbling after the stock has well more than doubled year to date. Still, we will keep the stock at Buy until it gives us a reason not to. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, is up 6.5% in the last week to reach new 52-week highs! In his latest update, Mike explained the stock’s recent strength: “Uber continues to expand into some interesting new ventures—yesterday, the firm inked a deal with Domino’s that will allow customers to book Domino’s delivery through the Uber Eats app, but have the food delivered by drivers from Domino’s locations. If that goes well, more deals could be coming where Uber (we assume) gets a small cut of any order without any cost regarding delivery. Elsewhere, Uber’s CFO is leaving the firm, which usually causes a short-term wobble in a stock, but instead, shares found big-volume support two days ago after a dip to the 25-day line. As with everything, some ups and downs are to be expected, and the Q2 report (due August 10) will be important to see if the buoyant EBITDA and free cash flow trends are still intact—but all signs point to business being even better than management’s forecasts. We’ll stay on Buy.” So will we. BUY

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, is about even since we last wrote. In fact, it’s been in the same 185-200 range since the start of June, which isn’t great action considering the S&P 500 is up 8% during that span. With a full portfolio, I think it’s time we part ways with WING, even though there’s nothing “wrong” with the stock or the company. Let’s collect our 15% profit in this growing fast-food enterprise and use it on a stock down the road that perhaps has a bit more upside. MOVE FROM HOLD TO SELL

The next Cabot Stock of the Week issue will be published on July 24, 2023.