Cabot Stock of the Week Issue: July 31, 2023

Stocks keep chugging along, shrugging off the latest (universally expected) Fed rate hike and a second-quarter earnings season in which the average S&P 500 company has reported a decline of -7.3%. (Though the economy continues to be resilient, evidenced by last week’s better-than-expected 2.4% GDP growth.) It’s a good time to be fully invested, or close to it, which is why the Stock of the Week portfolio has been at full (20-stock) capacity for about the last two months. Sure, this week’s loaded earnings slate (Apple and Amazon report, among many others) could derail things in the short term, but investors want to buy right now, and any weakness only seems to last a few hours.

So, with the bull market in full swing, it’s time to add a classic “Bull Market Stock”, as our Mike Cintolo calls them. Today, we add perhaps his favorite Bull Market Stock – one that Mike, like clockwork, recommends in Cabot Top Ten Trader every time he feels confident in a new bull market, as he did again recently.

Here it is, with Mike’s latest thoughts.

Blackstone Inc. (BX)

In my webinar last week, I went in-depth on why I believe the odds are very strong that the market has begun something of a new bull move—there are a lot of details, but the bottom line is that the overwhelming amount of top-down evidence is bullish, many studies are pointing to longer-term upside and, as opposed to 2022, this year is seeing a lot of good-looking leadership emerge. There are never any guarantees, of course, but it’s looking like the big down phase (in equities, but also other areas like real estate and possibly even fixed income) is likely over.

And that means it could be time to look at Bull Market Stocks, which is a phrase we came up with years ago that refers to firms whose fortunes are directly tied to the stock market. Blackstone (BX) might be the poster child for that sector: The well-known alternative asset manager is poised to see its giant portfolio increase in value, bringing in more fees, greater realizations and, as sentiment heats up, greater inflows, too.

Not that Blackstone has been flat on its back—at the end of Q2, the firm’s assets totaled a cool $1 trillion even, with 30% (give or take) in real estate, private equity and credit/insurance, with the rest (about 8%) in hedge fund solutions. (That said, real estate accounts for a greater share of distributable earnings, about 42% over the past year.) And what’s helped things stay afloat were two moves the company made in recent years.

The first was to focus on fee-based assets; at the end of June, they made up 73% of the total, and in the first half of this year, fee-based earnings per share actually ticked up, to $1.80 per share (up from $1.79 in the first half of 2022). That’s a big reason why Blackstone can pay a solid (albeit variable) dividend even in slow times (79 cents per share for Q2).

The other big change was a move to bring in more “permanent” capital, which, unlike a mutual fund or ETF, can’t be withdrawn! That now makes up 38% of total assets, which clearly offers a buffer during rough stretches like 2022 and earlier this year.

Don’t get us wrong—the bear market still hurt, with inflows slowing markedly (just $30 million in Q2) and with net realizations (sales of investments) down a whopping 74% this year compared to the first half of 2022. (Real estate realizations were off 97%!) Indeed, the aforementioned dividend peaked at $1.45 per share for Q1 2022, not surprisingly.

But Blackstone certainly didn’t keel over (the asset base is up 6% from a year ago, pretty good for what’s transpired), has plenty of liquidity and dry powder, and as we wrote above, this is all about what’s to come. Sure, there are still going to be issues out there (commercial real estate being one), and nobody is claiming the environment is suddenly going to morph into 1999 or 2020 within a couple of months. But in this case, it’s the direction that counts most, and it’s an increasingly good bet that the firm’s asset values will rise, which, in concert with a pickup in fee-related earnings, should see distributable income, dividends and even share buybacks head higher.

In classic Bull Market Stock fashion, BX had a very big, long and smooth rally from the vaccine blastoff in November 2020 to the market top in November 2021—and then lost a bit over half its value to its bear market low in December of last year. It spent most of 2023 etching a bottom, but since the Q2 report, BX appears to have changed character, leaping to multi-month highs and trading tightly despite some market volatility. You can buy right here, with plenty of upside likely ahead as long as the bull market remains intact.

Current Recommendations

Changes Since Last Week:
AdvisorShares MSOS 2x Daily ETF (MSOX) Moves from Hold to Sell
Spotify (SPOT) Moves from Buy to Hold

Even though our MSOX fund was actually up a bit in the last week, I’ve lost patience with the cannabis sector as a whole. Wake me up when cannabis stocks rally for longer than a couple weeks without immediately getting sold off for the first time in two and a half years. So, MSOX is out.

The rest of our portfolio is mostly in good shape, though Spotify (SPOT) was teetering on the edge of being cast off after losing 14% overnight following a disappointing earnings reports. It has since recouped about a third of those losses, putting us back in the black on it, but we’ll keep a close eye. In the meantime, we’ve downgraded it to Hold.

Four of our stocks are hitting new 2023 highs, while others are holding firm ahead of earnings this week. Given the sheer number of our companies set to report this week, this stands as a pivotal week for the Stock of the Week portfolio. We’ll see if we have to do more reshuffling a week from now. For now, though, most of the news is good.

Updates

AdvisorShares MSOS 2x Daily ETF (MSOX), originally recommended by Michael Brush in Cabot Cannabis Investor, appears to have bottomed late last week, and is up a few dimes since we last wrote. Still, Congress is now adjourned without advancing the ball on the SAFE Banking Act, so there is no obvious catalyst for cannabis stocks in the coming month. Since Congressional action was the impetus behind our early-July buy of MSOX, I don’t see the point of holding on to this fund in the hope that the cannabis sector will finally reverse two and a half years of losses. Cannabis stocks have reached the point where they have to prove it to be taken seriously; until that happens in a definitive way, I don’t see myself having any exposure to the sector. MOVE FROM HOLD TO SELL

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, retreated sharply last week after hitting multi-month highs. But shares of this London-based life insurance and investment management firm remain above their July lows, and roughly 40% below Bruce’s 14 price target, so this might not be a bad entry point if you have not yet bought. BUY

Brookfield Infrastructure Corporation (BIPC), originally recommended by Tom Hutchinson in Cabot Income Advisor, was down slightly ahead of earnings this Thursday, August 3. The trajectory is still decidedly up, with shares up 20% year to date and more than 2% in July. BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is hitting new 2023 highs above 70! There was no immediate catalyst, though the stock has generally been ticking higher since reporting an 88% year-over-year uptick in its June vehicle sales (253,046) and a 98% increase in second-quarter vehicles sold (703,561). Both numbers were up significantly from the previous month/quarter, so momentum is building for China’s largest vehicle maker – and Tesla’s most formidable global rival. The company will release July sales in early August, perhaps as early as this week. Given recent growth, I’d expect another big month, which could further catapult shares, which still trade below their 2022 highs (82). We have a 24% gain on BYDDY in three months, and it remains my highest-conviction long-term buy. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, gapped up to new 52-week highs after earnings last Thursday! Some highlights: Earnings beat analyst estimates, while revenue from Peacock – the company’s budding streaming service – improved 85% year over year to $820 million, with the number of subscribers nearly doubling to 24 million. Meanwhile, adjusted earnings per share of $1.13 beat analyst expectations of 97 cents – the company’s biggest bottom-line beat in two years. The media giant continues to bleed broadband customers – it lost another 19,000 in the second quarter – but higher average broadband costs more than offset the slight dip in subscriber numbers, resulting in a 4.4% improvement in broadband revenue. All told, it was a good quarter for Comcast, and we now have a gain of better than 40% on the stock. On the heels of a big gap up, it wouldn’t be a bad time to book profits on a few shares if you got in early after our recommendation last November. But big-volume gaps tend to be bullish signs and often result in more buying ahead. So officially, I’m staying on Buy. BUY

DoubleVerify (DV), originally recommended by Mike Cintolo in Cabot Growth Investor, is hitting new 52-week highs ahead of earnings after the bell today (Monday). Analysts are looking for 21% revenue growth with flat EPS. In his latest update, Mike wrote, “DV remains a very cool customer—besides a couple of sharp up and down days earlier this month, the stock has traded calmly and under control, refusing to even make contact with its 25-day line at this point. Of course, earnings will be vital: Wall Street sees top-line growth of 21% and earnings of six cents per share, but the outlook (especially if there are any signs of a reacceleration in the ad market) and progress updates on some newer launches could be even more important. We’ll stay on Buy, but keep new positions small this close to the report.” I concur. We’ll see what happens in a couple hours. 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 tad, but remains in its two-month range between 434 and 469. The company reports earnings next Tuesday, August 8. In his latest update, Tom wrote, “I thought LLY would pull back but I’m wrong again. LLY continues to hover near the high, seemingly building a base for its next surge higher. The market is just so excited about the potential mega-blockbuster drugs in the late-stage pipeline. … The market has refused to cool on LLY because it has two potential mega-blockbuster drugs up for approval later this year or early next as well as better than 20% annual earnings growth for the next several years.” BUY

GitLab (GTLB), originally recommended by Tyler Laundon in Cabot Early Opportunities, didn’t budge much in its first week in the portfolio. GitLab provides a source code management (SCM) platform with a host of collaboration, sharing and tracking tools for software developers. As Tyler wrote last week, “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 company could be an acquisition target and is growing well. Shares are up a modest 9.5% year to date but have been on a tear since an early-May bottom, up 85%. Still, GTLB trades at less than half its November 2021 highs (125). BUY

Kimberly-Clark de México (KCDMY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is exactly even in the last week despite some ups and downs following parent company Kimberly-Clark’s earnings report. Kimberly-Clark beat top- and bottom-line estimates and raised organic sales and operating margin guidance for 2023. Earnings per share improved 23% year over year while organic sales jumped 6%. Despite some good numbers, Kimberly-Clark (KMB) shares are actually down sharply since the report, perhaps because the company did not raise full-year revenue guidance. KCDMY shares dipped initially too, but have since recovered, and we are sitting on a nice 14% profit. BUY

Las Vegas Sands (LVS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been recovering nicely as the market has had time to digest its second-quarter earnings report. 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. After dipping below 56 following the report, LVS is now well above 59 and making a run at its July highs just below 60. We will leave it at Hold for now, but a break above those highs would likely prompt an upgrade. HOLD

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, tumbled a bit after reporting fiscal fourth-quarter earnings last week, but not below recent support at 328. Revenue and earnings topped analyst estimates, but fiscal-year 2024 guidance came in below investors’ rather lofty expectations, hence the brief post-earnings selloff. A sober look at those results shows that Microsoft’s revenue increased 8% year over year, buoyed by a 26% bump in its Azure cloud computing segment, while profits lifted 20% from the same quarter a year ago to top $20 billion for the first time. Due to its leadership position in artificial intelligence, however, Microsoft has created outsize investor expectations, and its more modest guidance for next year left investors initially disappointed. Still, the growth is impressive, and MSFT remains a long-term Buy. BUY

Neo Performance Materials Inc. (NOPMF), originally recommended by Carl Delfeld in Cabot Explorer, was down another 3% this week and isn’t off to the best start since we added it two weeks ago. 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. Additionally, the stock is a hedge on rising U.S./China/Taiwan tension. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, is down a point in the last week ahead of earnings this Wednesday, August 2. Analysts are looking for 39% revenue growth and 61% EPS growth, so the bar is high. Yet, Novo Nordisk has narrowly cleared estimates for four straight quarters. We’ll see what happens. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, was flat this past week despite reporting earnings. It was a solid quarter, with adjusted EPS up 46% year over year (and ahead of estimates), while revenues improved by 22.7%. But the top-line beat was narrow enough (0.99%) that NOW shares weren’t rewarded for the strong quarter. No matter. It just means that if you haven’t already bought NOW, you can still get a good price, especially with the company announcing a new partnership Nvidia and Accenture to accelerate adoption of artificial intelligence software in the corporate market. BUY

Shopify Inc. (SHOP), originally recommended by Tyler Laundon in Cabot Early Opportunities, was roughly flat ahead of earnings this Wednesday, August 2. Analysts anticipate 25.4% revenue growth with EPS swinging to a profit of six cents (it was down three cents a year ago). The company was recently upgraded to “Outperform” by MoffettNathanson analyst Michael Morton, who likes the e-commerce software provider’s potential to serve more large retailers; heretofore, Shopify has built its reputation on serving mostly small retailers. But this Wednesday’s earnings will be the more immediate short-term needle mover. BUY

Si-Bone (SIBN), originally recommended by Tyler Laundon in Cabot Early Opportunities, stabilized this week after losing more than 7% the week before. The company will report Q2 earnings next Monday, August 7. Analysts foresee 22% revenue growth with narrower losses than a year ago. 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, fell apart on disappointing earnings but has since recovered about a third of its losses. Revenue improved 11% year over year, but they fell short of analyst estimates, while third-quarter guidance also just missed analyst estimates. Nevertheless, the music streaming giant did report 551 million monthly active users for the quarter, up 27% year over year. The 220 million paid users was a 17% uptick from a year ago. Further, the company plans to raise prices on its Premium membership by as much as $2. So, there was enough encouraging news to hang on to shares – and the bounce off of 140 after plummeting from nearly 180 less than two weeks ago was a good sign – that we’ll hang on for now. But let’s downgrade to Hold. MOVE FROM BUY TO HOLD

Terex (TEX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been in retreat mode ahead of earnings tomorrow (August 1), with shares dipping from 65 to 58 in the last two weeks. That brings us back to our entry point from the beginning of the month. For the quarter, analysts are looking for 17.8% revenue growth and 55% EPS growth. The company has surprised on earnings by double digits in each of the last four quarters. So, with shares still holding above their 50- and 200-day moving averages, we’ll keep TEX at Buy for now. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, held firm this week after an 8.5% pullback on earnings the previous week. Investors didn’t like the company’s narrow margins (9.6%), chalking it up to Elon Musk’s decision to cut the price on several of the company’s top-selling models. 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. After more than doubling in the first half of the year, TSLA shares were due for some selling, and only a perfect earnings report would have prevented it. So, I’d view the post-earnings dip – and subsequent stabilizing – as a prime buying opportunity. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, is hitting new highs again ahead of earnings tomorrow (August 1). We now have a 44% gain in the stock! In his latest update, Mike wrote, “UBER is extended to the upside here, but it’s also refused to give up any ground of late, even as many big movers have wobbled. Earnings are due out Tuesday (August 1), and all eyes will be on bookings and EBITDA, as well as whether the 2024 outlook ($5 billion of EBITDA) can officially be raised. While it’s super early, we’re also interested to hear about any details surrounding some recent adjacent moves (like ordering Domino’s or from convenience stores through Uber Eats … but the product is delivered by others, or advertisements on the Uber app) and where it could lead. At day’s end, we have high hopes that Uber is a ‘new’ liquid leader, effectively a blue-chip outfit with the stock kicking off its first sustained run just a couple of months ago, but we’ll see how things go after earnings. We’ll stay on Buy, but as usual, keep any new buys small (and aim for dips) this close to the quarterly report.” We’ll keep it at Buy as well, but at this point, I’d hold off on adding shares until after tomorrow’s report. 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 August 7, 2023.