Cabot Stock of the Week Issue: July 22, 2024

So much for the dog days of summer!

In the last 10 days, one candidate for president has survived an assassination attempt, and the other has dropped out of the race less than four months before the election. Meanwhile, a budding tech power (and a Stock of the Week holding, unfortunately) all but halted global commerce due to a failed software update. Tensions between the U.S. and China (and Taiwan) are on the rise again. Second-quarter earnings season is off to a splashy start. The Fed is now all but certain to start cutting interest rates by September. Oh, and the Olympics start this week!

It’s a lot to process, especially while many of us are just trying to tune it all out and enjoy our summer vacations. Not in the Summer of 2024, apparently.

Now, the excitement hasn’t been all bad – especially that interest rate cut part. A week ago, the market was at all-time highs, and buying was seemingly spreading to sectors beyond the standard mega-cap techs and AI plays. In some areas, that’s still the case, but the topsy-turvy nature of the news cycle has elicited plenty of selling too, particularly among tech and growth stocks. So today, we add a drama-free dividend payer to the mix to give us an extra life preserver in case this volatile period – and the recent selling – expands.

Today’s addition is a favorite of Cabot Dividend Investor Chief Analyst Tom Hutchinson. It’s a stock that’s been in this portfolio before and is about as low-volatility as it gets, with a beta of 0.45. And yet, shares are up 25% year to date and have a long history of outperformance.

Here it is, with Tom’s latest thoughts.

McKesson Corporation (MCK)

The pandemic aftermath made us acutely aware of the importance of supply chains, as disruptions caused short supplies and skyrocketing prices. Efficient distribution is what makes this whole consumer economy work.

McKesson Corporation (MCK) is a leading domestic wholesaler of branded, generic, and specialty pharmaceutical products. The company operates a supply chain that delivers products from 1,300 drug manufacturers to over 180,000 points of dispensation throughout the country. It has a solid base of over 40,000 customers and supplies about one-third of the U.S. drug distribution market. It’s a Goliath with $309 billion in annual revenues.

The Business

McKesson buys drugs from manufacturers, delivers them, and resells them to retailers at a profit. Established in 1833, the company has been honing the process for nearly two centuries. It delivers from 1,300 producers to over 180,000 retailers using 29 strategically located distribution centers throughout the country. Naturally, it has strategic partnerships with companies like CVS, Walmart, and Rite Aid.

The extensive distribution network and enormous scale provide tremendous bargaining leverage with suppliers and customers that can’t be easily be duplicated by would-be competitors. That’s why the business is an oligopoly. McKesson, along with Cencora Inc. (COR) and Cardinal Health (CAH), account for 90% of the drug wholesale distribution market in the United States. There are very high switching costs among the providers, so they rarely lose business to the other two companies.

Results

The dividend is only $2.48 per share, which translates to a yield of 0.43% at the current price. The dividend is easily supported with a payout ratio of just 8.05% and the payout has grown by an average of about 12% over the last three years. Companies that consistently grow the dividend tend to be the best-performing stocks on the market over time.

And high performance has certainly been the case with this stock. Here’s how McKesson’s business has translated into stock total returns over the past several years compared to the overall market.

MCK has delivered more than three times the return of the S&P over the last five years and nearly six times the return over the last three. But this isn’t a high-growth technology stock that’s been clobbering the market. This is a steady defensive stock with highly reliable earnings that has performed so well with far less risk and volatility than the overall market. MCK has a beta of just 0.45, which means the stock is less than half as volatile as the overall market.

The Future

There are reasons to believe the stock can continue to deliver market-beating performance going forward. For one, the management is very shareholder-friendly. The company currently has an $8.9 billion share buyback program over the next few years. It plans to buy back $3.9 billion worth of those shares in fiscal 2024.

McKesson is also focusing on high-growth areas in oncology and biopharmaceutical services. In fact, its oncology network already serves 15% of new patients. Management knows the business and where the best opportunities are to deliver pharmaceuticals and services. The company also has plenty of free cash flow it can use to expand and make acquisitions.

That’s all well and good. It has a solid plan to proactively grow its business. But it doesn’t have to go crazy doing that because the main growth catalyst is the growth in existing markets. Pharmaceutical demand continues to rise every year at a solid pace because of the aging population. It has a huge share of a business that will grow all by itself. That’s the advantage of a massive tailwind like the aging population megatrend.

McKesson indicated earnings growth of 14% to 17% for this year. MCK sells at just 12 times forward earnings, which is well below the valuation of the overall market.

Current Recommendations

Changes Since Last Week:
CrowdStrike (CRWD) Moves from Buy to Sell
Super Micro Computer (SMCI) Moves from Buy to Sell

The upside of increased volatility and selling is that it’s an opportunity to finally trim our Stock of the Week portfolio down to a more manageable 25 stocks. Today, we say goodbye to two stocks that are selling like hotcakes all of a sudden – one due to obvious reasons, the other due more to sector rotation and other factors.

And yet, most of the rest of our stocks are acting well, including new highs from Blackstone (BX), Intuitive Surgical (ISRG) and UnitedHealth Group (UNH). The fact that none of them has anything to do with artificial intelligence shows that the market may finally be turning its attention elsewhere. We’ll pivot with it, but fortunately, we already have plenty of exposure to the non-AI realm.

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

Updates

AST SpaceMobile (ASTS), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was down marginally but remains on an upward trajectory and is an intriguing, potentially revolutionary, company. In his latest update, Tyler wrote, “AST SpaceMobile (ASTS) is working to build the world’s first space-based cellular broadband network that can provide uninterrupted smartphone coverage across the globe. Its most direct competitor is Elon Musk’s Starlink, and there’s a very large global market given over 40% of the global population lacks cellular broadband. It has taken investment from AT&T (T), Google (GOOG) and, most recently, Verizon (VZ). Near term, the company is trying to blanket the U.S. AST expects to launch its Block 1 (five BlueBird satellites) from Cape Canaveral shortly after they are delivered in the July – August time frame. Block 2 satellites are expected in late 2024 to early 2025. The company has been shuffling the management deck as it prepares to get commercial operations going and has also been communicating frequently with the market to drum up excitement and interest ahead of the Block 1 launch.” BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, held firm in the high 12s, though it hasn’t ascended much past 12.7 after breaking through that yearlong resistance a week ago. There was no news. Shares of this U.K.-based life insurance and investment management company are trading at less than 12x earnings and at 0.41x sales, and still have 11% upside to our 14 price target. Aviva has been a steady hand in our portfolio – a quality that’s all the more important now, after last week’s tech stock mini-meltdown – and the 6.6% dividend yield adds to our solid return thus far. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, missed earnings estimates last week in the middle of a market that’s punishing even earnings beats. And yet … the stock rose to new 52-week highs! BX shares have now added 17% in the last two weeks to top 140 for the first time since late 2021. It seems investors are focusing on the positives from Blackstone’s Q2 report: $39 billion in second-quarter investment inflows, up 31% from a year ago, and the company is deploying its money (up 71% year over year) as the costs of capital are already coming down due to the looming Fed rate cuts. Both positives confirm Blackstone’s “Bull Market Stock” (Mike’s term) reputation – when investment interest escalates, as in all bull markets, Blackstone thrives, hence the 31% uptick in investment inflows. You may want to wait for the next dip to buy BX shares, but as long as the bull market is intact, it makes sense to keep the stock at Buy in our portfolio. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was down 7% this week, dragged down by the broad selling in tech stocks in recent days. So, AVGO hasn’t gotten a bump yet from its 10-for-1 stock split from last Monday. We’ll see if it bounces back this week if the market gets back in gear. Regardless, we still have a huge gain on this AI-fueled stock, and this modest selling may be temporary. HOLD

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, has pulled back sharply this month, from highs above 95 to 79 as of this writing. It’s been enough to convince Mike to sell a portion of his shares, though he’s holding the rest, as he noted last Thursday: “Cava (CAVA) is getting slapped around today, slicing through its 50-day line on average volume. That’s certainly not good, but also not a total surprise—having sold a third of our stake when the stock initially cracked, we’re willing to give what we have left a bit more room to consolidate given the unique long-term growth story here. If you’ve been following along, continue to hold your remaining shares, though we’ll be on the horn with any changes. Earnings are likely due in mid-August.” Because we still have a solid gain on the stock, and it appears that the selling may be slowing, we’ll keep CAVA at Buy for now. But any further slippage, perhaps to below two-month support at 77, could prompt a downgrade to Hold. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, had the kind of nightmarish week that keeps CEOs of public companies awake at night. The cybersecurity company had a faulty software update that halted business around the world, grounding flights and slowing operations at banks, hospitals and hundreds of other businesses last Friday (my local Starbucks was affected). All told, 8.5 million Windows devices worldwide were impacted. And CRWD stock has cratered, face-planting from 343 to 265 in little more than one full trading day. I didn’t sell immediately on Friday because I wanted to see if there would be a bounce-back today, considering this was essentially a human error and not a cybersecurity issue for a cybersecurity company. But the selling has only accelerated, and it’s time to get out. CRWD has been a great stock for us over the last 10 months, up more than 130% as of a week ago. Now it’s heading south fast, so we need to recoup as much return as we can before it falls any further. MOVE FROM BUY TO SELL

Dick’s Sporting Goods (DKS), originally recommended by yours truly in my Cabot Value Investor advisory, had a rough first week in the portfolio, down about 6% on no news. It was almost certainly dragged down by last week’s market selloff, including in retail stocks. Shares are still comfortably up from their July bottom (198), however, and Dick’s remains one of the more resilient, steadily growing retailers out there, with both earnings and revenue accelerating. On top of that, it trades at a discount at just under 16x forward earnings estimates, which is why I selected it in Cabot Value Investor. If you didn’t buy the stock on my recommendation last week, you can get it at a much better price now. With no real reason for the dip, it’s still very much a Buy. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was down sharply last week, along with everything else with “meat on the bone.” Shares of our best-performing stock fell more than 9% after reaching new highs above 950. No matter. All stocks encounter turbulence at some point, and LLY shares had gone nowhere but up for two and a half months. It’s still a co-leader in the booming weight-loss drug space, thanks to Mounjaro and Zepbound. And it still has a promising Alzheimer’s drug, donanemab, that appears to be on the brink of FDA approval, creating yet another new revenue stream. I recommended selling a few shares last week with the stock touching new highs. For those who don’t already own the stock, the sharp dip since then looks like a strong buying opportunity into one of the market’s dominant stocks. BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, is one of the few tech-related stocks that held its gains in the past week, despite being at all-time highs. That’s a great sign, especially on no news. GDDY is clearly in favor with investors right now. We’ll see if the August 1 earnings report can help keep the momentum going – or at least not pour cold water on it. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, keeps bouncing around between the low 11s and the high 12s. The good news is the cannabis stock appears to have bottomed just below 11 in late May, as the lows are now becoming higher. The company is set to open a new Rise cannabis store in Florida at the end of the month, which would take its Florida store count to 17 and total national count to 94. Recreational-use cannabis is on the ballot in Florida this November, so that could be a major potential catalyst for GTBIF shares if approved. We’ll keep it at Hold until a clear trend develops. HOLD

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, got a HUGE boost from earnings last Thursday, with the stock up 12% (and counting) to reach new all-time highs above 465! The company beat earnings estimates as worldwide procedures using its da Vinci robotic surgery system increased 17%. The company is benefitted from all the “catch-up” surgeries people are having after a couple years of not being able to do elective surgeries due to the Covid pandemic. The da Vinci is now in 341 medical facilities, 10 more than in the same period a year ago. On top of that, the company is starting to roll out its new and improved da Vinci 5 system quicker than expected, and that’s already accelerating sales; the company sold 70 of them in the second quarter, up from just eight in Q1. The fast rollout prompted this research note from William Blair analyst Brandon Vazquez: “Frankly, this was well ahead of our expectations. Despite supply constraints and upcoming system upgrades, management expects sequential growth in da Vinci 5 placements through 2024, which we think demonstrates the end-market demand for this system.” The da Vinci 5 won’t even enter the European market until 2026, so its introduction could help accelerate sales for years. There’s a lot to like about Intuitive Surgical, and investors have taken notice. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, was down a point on no news but remains a reliable monthly dividend payer in our portfolio. The 8.3% yield, on top of the double-digit share price gain, makes this business development company an excellent all-weather holding. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, has encountered some weakness in July along with the other mega-cap tech and AI stocks that were riding high entering the month. The company reports fiscal Q4 earnings next Tuesday, July 30, which could help right the ship. Analysts anticipate 14.6% revenue growth in the quarter, which would mean MSFT grew by 15.5% this year. EPS growth for the year should be about 20.5% ($11.82). The hurdle for fiscal 2025 guidance is $279.8 billion revenue (+14.3%) and EPS of $13.36 (+13%). We’ll see what happens. Regardless, MSFT is a long-term buy for any portfolio, and a modestly down couple of weeks certainly doesn’t change that. 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, is roughly flat in the last week despite an impressive earnings report last Thursday. Both earnings per share and revenue topped estimates; sales improved 17% year over year, and the company raised full-year guidance slightly; and membership of its new ad-supported service expanded by 34% year over year. That’s helped the streaming giant become more profitable, as EPS came in at $4.88, up 48% from the $3.29 it earned in Q2 a year ago. The lack of movement in NFLX’s share price in reaction to the stellar report likely means the good results were mostly baked in – NFLX shares are up more than 33% year to date. Given its growing domination of the lucrative streaming space, NFLX is a long-term buy for any growth-oriented portfolio. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, was down more than 6% to fall to a new two-month low. Here’s what Carl had to say about the drop-off: “Drugmaker Roche entered the market as a potential competitor while Novo Nordisk’s Ozempic was linked to lower rates of dementia and other cognitive issues in an Oxford study.

“After rapid growth, Novo shares are pausing but should resume an upward trend as the market potential is huge and demand is growing.” BUY

Ollie’s Bargain Outlet (OLLI), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, gave back some of its gains from the previous week as retailers took it on the chin. Still, shares of this mid-cap bargain retailer are in an uptrend, up from 68 to 100 since the start of April. And the pullback was quite modest given that shares were trading at four-year highs near 104 prior to the down move. BUY

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, was up from 37 to 39 this week as the stock slowly recovers from its June selling. In his latest update, Mike wrote, “On Holding (ONON) (and most retail names) had a tough retreat from around 44 to 36, retesting the top of its prior base, though it has found two days of above-average-volume buying support this week, with today certainly looking promising as well. Overall, we still think ONON checks most of the boxes of a winner: Strong sales and earnings growth, big projections both near and longer term as the firm expands its offerings within footwear and apparel, as well as a stock that is early stage (just broke out in May) and showed a lot of upside power. Of course, we own the stock and not the company, and a dip back into the 35 area (give or take a few dimes) would be iffy, but we’re optimistic the stock can resume its advance (and might be doing that here).” BUY

Qualcomm, Inc. (QCOM), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, fell to new two-month lows below 190, though it’s bouncing back a bit today. Tom says there’s no reason for alarm: “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.” The stock has dipped below its 50-day moving average but remains well north of its 200-day line. Keeping at Buy for now, but another bad week could change that. Earnings are due out next Tuesday, July 31, so keep new buys small. BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is testing two-month support at 67 and seems to keep alternating up and down weeks after advancing 76% in the first half of the year. Carl says its rise was “sparked by a low valuation, improving financial trends, and a shift in investor expectations. Sea posted $3.7 billion in total revenue during the first quarter, a 22.8% increase over the first quarter of 2023 The company is expected to report its next earnings around August 13.” This is an excellent, versatile play on economic growth in Southeast Asia – and it trades at a mere fraction of its 2021 highs. BUY

Super Micro Computer (SMCI), originally recommended by Carl Delfeld in his Cabot Explorer advisory, cratered again this week, falling nearly 15%. And while the stock is still holding the line at its June lows, I just don’t think it’s worth all the wild fluctuations anymore. There’s plenty of upside for this AI stock, but it’s almost like a leveraged play on Nvidia (NVDA), and it’s just not worth the constant volatility anymore – especially now that AI stocks are starting to take on water. Let’s sell. MOVE FROM BUY TO SELL

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down about 5% ahead of earnings tomorrow (July 23). Analysts aren’t expecting big things: -0.8% sales growth and about a 32% decline in earnings per share. Perhaps the company can do something it hasn’t in the last three quarters: surprise to the upside. The mildly better-than-expected Q2 deliveries results provided some hope, and were enough to send TSLA shares soaring for the first time all year. Will another earnings miss send the stock right back down the chute? We’ll see what tomorrow brings. I’d keep new buys very small until after the earnings report. BUY

Uber Technologies (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, was down from 72 to 67, prompting Mike to sell. Here’s what Mike had to say about it last Thursday: “Uber (UBER) has been a bucking bronco in recent days, getting tossed around by news (Tesla’s delay of the Robotaxi unveiling, then a loss in U.K. court concerning driver pay) and the market. However, while gyrating sideways isn’t the worst, we’ve decided to sell the rest of our position today for a couple of reasons. First, of course, the stock has been lagging for a while, topping out in February. Second, more recently, the stock has repeatedly been rejected at resistance in the 73 to 75 area, with yesterday’s mini-breakout failing in a big way today. And third, this is all happening while the broad market kicks into gear—many out-of-favor names (like UBER) have found a bid, but obviously, this one hasn’t been able to. Might UBER find support and get going on earnings? It’s possible, and we’re not ruling out getting back in if we see a new, sustained uptrend forming. But at this point, our patience has run out, especially as we’re looking to move money into fresh winners if and as they emerge. We’ll take the rest of our profit off the table and hold the cash. SELL.” Should we do the same? Since we already downgraded the stock to Hold a few weeks back and have (roughly) a 100% gain on it, let’s hang in there, at least until after the August 6 earnings report – or, perhaps, if UBER shares dip all the way below June support at 63. HOLD

United Airlines (UAL), originally recommended by yours truly in the Growth/Income Portfolio of Cabot Value Investor, had a very good bounce-back week, bottoming at 44 and rising to 48 despite a relatively mixed earnings report and a worldwide tech fiasco that affected airlines most (see CrowdStrike write-up). Earnings per share were down 17.7% year over year but did handily top even more pessimistic estimates. Revenues, meanwhile, improved 5.7% year over year but fell just short of estimates. Third-quarter guidance also came in a bit light, though full-year EPS guidance ($9-$11) remained the same. And yet, the stock was up meaningfully – perhaps because the pre-earnings selling was overdone, and value hunters have finally spotted a bargain in UAL. The shares, after all, trade at a microscopic 5x earnings estimates, and at 0.29x sales. I have a price target of 70 in my Cabot Value Investor portfolio, which would give UAL 45% upside from here. Still, we’ll keep this one a Hold until it can string together consecutive good weeks. HOLD

UnitedHealth Group Inc (UNH), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is soaring after reporting stellar earnings last Tuesday! Here’s what Tom had to say about it: “Just when I started bad-mouthing this stock it rallied. UNH is up over 11% in less than two weeks and at the highest price since January. It was up over 5% for the day at midday Tuesday after reporting earnings. The company beat earnings forecasts as it added more patients and pharmaceutical customers despite a continuing negative effect on profits from the February cyber-attack. UnitedHealth also reaffirmed its previous guidance for 2024 despite the negative impact of the cyber-attack. The market is apparently happy and reassured.” The stock has continued to rise since, up 8.5% since the report and 14% in the last two weeks. We now have a solid gain on UNH after just two months. BUY

United States Steel Corporation (X), originally recommended by Matt Warder in his Cabot Turnaround Letter, mostly held steady at 38 ahead of earnings on August 1. The latest on its pending deal with Nippon Steel is that Nippon has hired a former U.S. Secretary of State to advise them on the deal. Japan’s largest steelmaker is attempting to acquire U.S. Steel for $14.9 billion, which would be an instant boost to shares should it happen. But the deal is currently caught up in regulatory hurdles from the U.S. government, plus opposition from the United Steelworkers union, which fears the merger could cost its members jobs. Oh, and Donald Trump and Joe Biden have said they would block the deal … although we don’t know yet what Biden’s presumptive replacement, Kamala Harris, would do. A lot to consider here. So it’s probably best to focus on the basics like steel prices and earnings, and fortunately, we’ll have fresh news on the latter in a little over a week. 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 29, 2024.

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