Cabot Stock of the Week Issue: July 24, 2023

Despite some mini-wobbles, the bull market rolls on, with the S&P 500 up slightly since we last wrote. This week could put it to the test somewhat, with the Fed all but certain to raise interest rates another 25 basis points on Wednesday and a bevy of market-moving mega-cap tech stocks (Meta, Google, and our Microsoft) set to report earnings. But bull markets tend to be resilient and little affected by outside factors, at least over the intermediate and long term, so any pullback this week is likely to be short-lived. Besides, the rate hike has been all but guaranteed for about the last month, ever since the Fed insisted that its inaction in June was merely a “pause.” So, an expected 25-basis point hike isn’t likely to do any damage.

With the market humming along, let’s add another technology stock with big upside. In fact, today’s stock has already proven it can rise much higher, trading at less than half its late-2021 (i.e., post-IPO) peak at the moment, but with a full head of steam in the last two months. It’s a mid-cap software stock Tyler Laundon recently added to his Cabot Early Opportunities portfolio.

Here are Tyler’s latest thoughts.

GitLab (GTLB)

GitLab (GTLB) provides a source code management (SCM) platform with a host of collaboration, sharing and tracking tools for software developers.

In a digital economy, the quality and stability of an organization’s source code is everything. No application exists without it. And having a platform that permits near-instantaneous changes can mean success or failure for users that rely on that application.

That’s what GitLab provides. The company’s end-to-end DevOps platform functions as a system of record for source code.

The buzz on the Street is that analysts are becoming more confident that GitLab can gain share in this specialized area of the market. And yes, it does have exposure to AI as well.

The company has already integrated AI into the platform and has been using it for years. AI is currently used in nine offerings, including Suggested Reviewers and Code Suggestions.

The technology is used to generate code, summarize various code management processes (reviewers, issue comments, merge requests, etc.) generate tests, explain code and in GitLab chat, to name a few.

More solutions with AI are currently in beta mode, including ModelOps, a feature to the company’s main DefSecOps platform that will help with code writing suggestions. Estimated cost will be $9 per month.

And GitLab is working on its own proprietary models using Google Vertex AI. Central to this strategy is the idea of protecting code and providing privacy tools.

With just over 7,000 customers and over 1 million paying users, AI capabilities can be significant in both new customer acquisition and retention.

That said, Microsoft (MSFT) owns GitHub, a competing platform. And with Microsoft’s partial ownership of OpenAI and massive scale, it’s a formidable competitor.

It may be that GitLab’s best path forward is to be acquired by a similarly large player. But we’ll see.

Bigger picture, and what investors will be keen to hear more about on the Q2 earnings call in early September, GitLab is working to convert free users to paid, increasing prices for the higher-tier solutions, launching Duo AI (variety of AI-powered workflows) and getting large customers onto its single-tenant SaaS solution, Dedicated.

If that all sounds like Greek to you, the bottom line is that analyst estimates are creeping up and the Street is now looking for full-year 2023 revenue of $543 million (+28%), up a couple million from a month ago.

EPS is still seen negative this year (-$0.15 expected) but could turn the corner and be positive in 2024 ($0.04 currently expected).

This all seems extremely reasonable given that management just reaffirmed its full-year revenue guidance ($541 to $543 million) last Tuesday.

At the same time, management announced it had hired a long-time Microsoft executive, Chris Weber, to hold the post of Chief Revenue Officer.

As for the stock, GTLB came public at 77 in October 2021 and traded as high as 143 during the pandemic. But then it gave it all back, and then some.

Shares bottomed just weeks ago, at 26.2, on May 4. Some excitement came back to the stock after the June 5 earnings report, which sent GTLB from 35 to 46.4 the next day.

The stock has mostly traded between 50 and 55 in the month of July, with a little pullback to the lower end of that range last week.

While there are no sure bets in the market, it appears that there is a lot of room for improvement with GTLB, both in terms of financial performance and market expectations. That’s often a recipe for success with a fallen star growth stock, provided management executes.

Current Recommendations

Changes Since Last Week:
AdvisorShares MSOS 2x Daily ETF (MSOX) Moves from Buy to Hold
Green Thumb Industries (GTBIF) Moves from Hold to Sell

As I wrote above, most of the market looks great right now. But the cannabis sector still stinks. So today, we’re cutting bait with our one cannabis stock (GTBIF) and downgrading our recently added leveraged ETF (MSOX) to Hold – which may end up being little more than a stay of execution.

Otherwise, most of the stocks in our portfolio are acting well heading into a pivotal second-quarter earnings stretch, with many of our companies reporting results in the next week to 10 days. Here’s what’s going on with each of our stocks in a still-full portfolio.

Updates

AdvisorShares MSOS 2x Daily ETF (MSOX), originally recommended by Michael Brush in Cabot Cannabis Investor, has been a major disappointment in the just two weeks since we added it to the portfolio. And while the premise of adding this ETF that moves two to four times more – in both directions – than the MSOS Cannabis ETF was that Congress was primed to possibly make progress on the SAFE Banking Act which would grant banking access to cannabis companies, it hasn’t happened. I can’t in good conscience rate this fund a Buy anymore, so I’m downgrading to Hold. Michael says action from Congress could come in the back half of July, so we’ll hold on one more week. If MSOX falls even more between now and our next issue (or possibly sooner), we’ll sell and move on to something in a more reliable sector. MOVE FROM BUY TO HOLD

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, is hitting new two-month highs despite an absence of news. And yet, shares of this London-based life insurance and investment management company still have 35% upside to Bruce’s 14 price target. BUY

Brookfield Infrastructure Corporation (BIPC), originally recommended by Tom Hutchinson in Cabot Income Advisor, was almost exactly flat in the last week, and has scarcely moved since gapping up above 46 in the first half of July. Earnings are due out August 3 (next Thursday), so perhaps that will be the next catalyst. BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has been flat for about the last two weeks. The only real news during that time is that India has blocked a $1 billion deal for the company to build a new manufacturing plant there. The Indian government rejected the bid from BYD and India-based firm Megha Engineering and Infrastructures Ltd. due to national security concerns, namely the use of Chinese technology. Investment proposals from countries that border India require political and security clearance. I doubt this is the end of it, and if it is, BYD will surely find another place to build a new mega-factory. In the short term, though, the deal’s rejection has seemed to slow the building momentum in BYD’s share price a bit. But this is little more than a short-term concern, especially with earnings due out next month. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, rose to new 2023 highs ahead of earnings this Thursday, July 27. Analysts are anticipating little to no top- or bottom-line growth, but the company has comfortably beaten estimates in each of the last four quarters. Still, with shares of the media giant up 23% since a March bottom, it’s possible an earnings beat wouldn’t extend recent gains much. Regardless, however, this is simply one of the steadiest, most reliable stocks in our portfolio. BUY

DoubleVerify (DV), originally recommended by Mike Cintolo in Cabot Growth Investor, has been basically flat the last couple weeks ahead of earnings next Monday, July 31. In his latest update, Mike wrote, “DoubleVerify (DV) continues to act just fine, with a shakeout late last week followed by a quick bounce back to its recent highs. The firm is working with Roku to cut back on connected TV ad fraud: DoubleVerify identified a fraud program known as SmokeScreen that worked in the background of screensaver apps of some always-on devices (like streaming sticks and game consoles) and fraudulently placed ads that were never seen, bringing in $6 million of bogus ad sales, and it’s aiming to prevent more in the future (which adds to its platform’s attraction, of course). All that said, earnings are out next week (July 31), which will be key—we’ll stay on Buy, but keep new buys small and aim for dips this close to the report.” We’ll stay on Buy too. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is closing in on its June highs again after adding another 3% in the last week. As Tom noted in his latest update, “There was more good news about its late-stage Alzheimer’s drug yesterday. A phase 3 trial showed the drug significantly slowed cognitive decline in people in the early stages of the disease, which further shows the drug’s potential as a mega-blockbuster.” Now up 39% on this stock in four months, it wouldn’t be a bad idea to trim a few shares, maybe selling about a quarter of your position if you got in shortly after our late-March recommendation. But there’s no reason to doubt this stock can keep advancing, which is why we’re keeping our official rating a Buy. BUY

Green Thumb Industries (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, has fallen below two-month support, so it’s time to Sell. I’m tired of the cannabis sector as a whole and have lost faith in cannabis stocks’ ability to make any headway until meaningful action from Congress occurs, which I also am not holding out much hope for. We will hang on to MSOX (see above) just in case Congress surprises us before they go on August break. But I’m no longer willing to have two cannabis positions while we cross our fingers for a catalyst from a notoriously unreliable group of people in Washington. MOVE FROM HOLD TO SELL

Kimberly-Clark de México (KCDMY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, coughed up about half its gains from the previous two weeks ahead of parent company Kimberly-Clark’s Q2 earnings release tomorrow (July 25). Perhaps investors know something. Analysts are looking for 1.4% revenue growth and 10.4% EPS growth. Kimberly-Clark handily beat estimates last quarter, so we’ll see what happens. BUY

Las Vegas Sands (LVS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, got knocked back after earnings last Wednesday but has since recouped about half those losses as the market takes a more sober look at them. After all, the company beat both top- and bottom-line estimates, with adjusted earnings per share coming in at 46 cents after reporting an adjusted loss of 34 cents in the same quarter a year ago. Revenue was even better, coming in at $2.54 billion, up 143% from the mere $1.04 billion in revenue it reported last year – before China had lifted its draconian Covid restrictions. I’m not quite sure what the market didn’t like about these results, though the selling was both modest and short-lived. I expect the bounce-back from the last couple trading sessions to continue, but we’ll leave LVS at Hold for now. HOLD

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, keeps holding in its 328-348 range ahead of earnings tomorrow (July 25). Analysts expect 7% revenue growth and 14% EPS growth. Earnings have surprised to the upside in each of the last three quarters. That bodes well, but we’ll see what happens. BUY

Neo Performance Materials Inc. (NOPMF), originally recommended by Carl Delfeld in Cabot Explorer, was down 3% in its first week in the portfolio. Neo manufactures the building blocks of many technologies and advanced industrial materials. These include magnetic powders and magnets, specialty chemicals, metals, and alloys – all using rare earths and critical metals. This stock is also an excellent hedge on rising U.S./China/Taiwan tension. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, was up another 1.5% last week, though it was off a bit this morning. Sales for this Danish drugmaker remain strong, especially in the diabetes and weight loss segment. We have a 22% gain on the stock this year. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, is down somewhat sharply after hitting new all-time highs above 600 last Wednesday – and ahead of earnings this Wednesday (July 26). Analysts foresee 21% revenue growth and 26% EPS growth. The cloud computing company has beaten earnings estimates in each of the last four quarters, including by double digits in each of the last two. BUY

Shopify Inc. (SHOP), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down a couple points this week despite an upgrade from “Market Perform” to “Outperform” by an analyst from MoffettNathanson. The analyst, Michael Morton, likes the e-commerce software provider’s potential to serve more large retailers; heretofore, Shopify has built its reputation on serving mostly small retailers. Earnings are due out next Wednesday, August 2. BUY

Si-Bone (SIBN), originally recommended by Tyler Laundon in Cabot Early Opportunities, is down 7.5% in the last week and is hitting new two-month lows. There was no news. The stock has dipped below its 50-day moving average but remains well above its 200-day line, so I’m not overly concerned yet. Earnings aren’t due out until August 7. Si-Bone is a small-cap MedTech company that specializes in implants that solve issues of the SI joint and pelvis. BUY

Spotify (SPOT), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, coughed up a lot of its 13% gain from the previous week ahead of earnings tomorrow, July 25. Analysts expect 22% revenue growth and narrowing losses for this unprofitable streaming audio company. The reason for most of the pullback in shares appears to be the company’s decision to raise prices for premium members, to $10.99 from $9.99. Whether the $1 price hike will cost the company many subscribers remains to be seen. This looks like a one-day market overreaction (shares are down 5% today), and it’s very possible a stronger-than-expected quarter tomorrow could quickly right the ship. BUY

Terex (TEX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down a bit after advancing more than 6% the previous week. Earnings are due out next Monday, August. 1. Analysts expect big things: 17.8% revenue growth, 55% EPS growth. And the company has surprised to the upside by double digits each of the last four quarters. So perhaps this mini-dip is a great entry point into this diversified manufacturing company. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is down about 8.5% since reporting earnings last week, as Wall Street didn’t like the company’s increasingly narrowing margins due to recent price cuts in some of its signature car models. Operating margins were 9.6%, the company’s lowest in the last five quarters. Investors also didn’t like that Elon Musk didn’t give any specifics on a timetable for the long-awaited release of its Cybertruck after the company finally produced its first model of the DeLorean-esque truck. Still, most of the earnings numbers were good: Revenue from the company’s core automotive business rose 46% year over year; net income improved 10.5%; deliveries came in at 466,140; and the company produced 479,700 vehicles. As I wrote last week, only a perfect earnings report would have prevented shares from slipping given that they were up more than 135% year to date headed into the release. They’re still up 116%. I’d view this overreaction to the declining margins as a buying opportunity. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, just keeps hitting new 52-week highs! The stock is up another point since we last wrote. In his latest update, Mike wrote, “Uber (UBER) looks great, having hit higher highs this week following its 25-day line test last week. Once again, management is using the firm’s heft to ink new add-on deals—it recently inked a deal that allows people to use the Uber Eats app to order delivery from the 3,000 convenience stores that partner with Vroom Delivery. We’ll stay on Buy, though aim for dips, especially with earnings coming soon (August 1).” Good advice. However, we are now up 38% on this position, so if you want to sell a few shares ahead of earnings next Monday, that’s a fine choice as well. BUY

If you have any questions, don’t hesitate to email me at chris@cabotwealth.com. You can also follow me on Twitter, @Cabot_Chris.

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 31, 2023.