Cabot Stock of the Week Issue: July 5, 2023

After a brief retreat in late June, stocks are hitting new 2023 highs as we enter July and are fast approaching 52-week highs. The new bull market is in full swing, expanding from a handful of mega-cap tech stocks and artificial intelligence-related stocks to a much wider swath of the market. So today – in this holiday-shortened week – we add a cyclical stock that’s acting like a growth stock – so much so that it caught the attention of our growth guru Mike Cintolo, who recently recommended the stock to his Cabot Top Ten Trader readers.

Here it is, with Mike’s latest thoughts.

Terex (TEX)

If we told you a couple of years ago that the Federal Reserve would hike rates from basically nothing to north of 5%, while running off their balance sheet and continuing to threaten more hikes, all while supply chains were still constraining things, you probably wouldn’t have predicted that we’d be in the midst of a construction boom. But that’s what’s happening, in large part because of the resilient economy and a slew of federal and state programs that have passed in just the past couple of years.

Indeed, just on the federal level, the infrastructure act alone is likely to result in $1.2 trillion of investment over 10 years, while the green energy bill last year and the CHIPS bill passed before that are also goosing things. Basically, whether it’s roads and bridges, semiconductor facilities, new data centers, expanding electric grid capacity, new green energy facilities or other big projects, demand is super strong and likely to remain so for a long time to come.

That’s why Terex, normally a mundane cyclical stock, is doing great today and should have solid intermediate- to longer-term potential. The company’s offerings run the gamut of big machines you need to do big projects—its materials processing segment has a variety of offerings that crush, screen, wash, grind, chip and shred the basic materials needed to do all these projects. And the firm is also a leader in aerial work platforms (scissor and boom lifts, etc.), cranes (tower and terrain cranes) and waste separation products (getting valuable parts and materials from construction waste, saving money and helping the environment).

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.

The stock started to sniff this out late last year, when TEX rallied smartly from its bear market lows to the 60 level in late February. The correction after that was sharp (when the banking crisis shook investors’ confidence), but the stock bottomed out above its 40-week line and has marched all the way back to that prior high. There’s room to run even at 52-week highs, but you should buy on dips to be safe. BUY

Current Recommendations

Changes Since Last Week: Changes Since Last Week:
Las Vegas Sands (LVS) Moves from Buy to Hold
Xponential Fitness (XPOF) Moves from Hold to Sell

The new bull market is forcing us to keep a full, 20-stock portfolio, as more than a few of our holdings are eclipsing 52-week or even all-time highs as I write this. But one of our stocks, Xponential Fitness (XPOF), has fallen on hard times thanks in large part to a scathing short seller’s report. So, it’s the odd man out this week to make room for Terex (TEX). Maybe next week the choice won’t be so easy.

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

Updates

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, is up slightly since we last wrote. In his latest update, Bruce noted about this London-based life insurance and investment management company, “Aviva shares rose 1% this past week and have 38% upside to our 14 price target. Based on management’s guidance for the 2023 dividend, which we believe is a sustainable base level, the shares offer a generous 8.2% yield. On a combined basis, the dividend and buybacks offer more than a 10% ‘shareholder yield’ to investors.” BUY

Brookfield Infrastructure Corporation (BIPC), originally recommended by Tom Hutchinson in Cabot Income Advisor, hasn’t budged since our last issue. In his latest update, Tom wrote, “The infrastructure company stock has pulled back from the recent high. But BIPC is still around the higher levels of the recent range. The stock got new life after a sluggish period because Brookfield reported a solid earnings quarter with funds from operations (FFOs) per share growth of 12.5% over last year’s quarter. The stock had been suffering from the lull in defensive stocks, but that performance disparity might not last. A pullback from the recent spike higher is typical for this stock. But it is getting cheaper ahead of a market where the rally is broadening out.” BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has been on a rollercoaster ride in the last month, rising to the brink of 70, bottoming out in the 62s, and now in recovery mode again, breaching 66 this morning. In his latest update, Carl wrote, “The company recently announced the launch of a new ‘leopard’ EV brand featuring a range of vehicles from sports cars to off-road models. BYD has already sold almost a million cars in the first five months of this year, double the previous year’s figure – with hopes for 3.6 million for the year. BYD is the world’s largest producer of electric vehicles including hybrids and the second largest producer of EV batteries.” Despite the recent ups and downs, we have a very solid 19% gain on BYDDY in just over two months. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, is hitting new 2023 highs! The stock is up 3% since we last wrote, on no news. Shares still have 10% upside to Bruce’s 46 price target, even after rising nearly 17% this year. BUY

DoubleVerify (DV), originally recommended by Mike Cintolo in Cabot Growth Investor, just keeps hitting new highs! The stock is up about 3.5% since we last wrote and has reached its highest point since October 2021. The encouraging action was enough to convince Mike to add to his position in his latest Cabot Growth Investor issue: “DV isn’t necessarily racing higher, but we’re impressed with its continuing persistent rally, with just a handful of down days at all since the breakout out in late May. Of course, some selling will eventually arrive, but we’re optimistic that more and more institutional investors are eager to get a position in the ad verification industry in general, and (because it’s the leader) in DoubleVerify in particular. Given the bullish story, numbers and chart, we’re going to be a bit aggressive and average up on DV, buying another half-sized stake here—on the combined position, we’ll use a mental stop a bit below the 50-day line (now near 32.5 and rising steadily), which should be less than 15% off our average cost.” As for us, DV is off to a nice start in its first month in the Stock of the Week portfolio. We’ll keep it at Buy. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is yet again hitting new all-time highs, tacking on another 2% since we last wrote. We now have a 40% gain on LLY in just three and a half months! If you bought early, I’d take a few shares off the table, selling about a quarter to a third of your original stake. But there’s certainly nothing wrong with the company or the stock, which could go higher still. In his latest update, Tom wrote, “A pullback after the huge surge higher this spring would be historically normal behavior for this stock. But it isn’t happening. LLY has trended slowly higher instead of pulling back. 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

Green Thumb Industries (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, has suddenly hit the accelerator, gapping up more than 7% this morning! There was no obvious reason for the run-up, aside from the company setting an earnings date of August 8. In his latest update, Michael wrote, “Green Thumb was the third-largest cannabis company in the U.S. last year, with operations in 15 markets. It has been the most profitable multistate operator of all the big ones – a sign of good management.

“Green Thumb branded cannabis products include &Shine, Beboe, Dogwalkers, Doctor Solomon’s, Good Green, incredibles and RYTHM. The company operates a chain of national retail cannabis stores called RISE. It has 83 retail stores and 18 manufacturing facilities in 15 U.S. markets.

“Green Thumb is expanding its medical footprint in Florida through a lease agreement with the convenience store chain Circle K. This could be a big deal since the Circle K chain has 600 locations in Florida. Ongoing market developments in Illinois and New Jersey could be strong catalysts for Green Thumb Industries.

“Founder Ben Kovler is chairman and CEO. Research shows that founder-run companies often outperform. Kovler has a 26% stake in the business and holds nearly 59% of voting power. Green Thumb trades at a price to sales ratio of 1.76.”

Perhaps the aforementioned developments in Illinois and New Jersey are driving the stock this morning. We’ll likely know more next week. Regardless, the resurgence in GTBIF’s share price has us back to break-even, with plenty of upside remaining. We’ll see how it behaves after today’s big gap. BUY

Kimberly-Clark de México (KCDMY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, held firm this past week and appears to be building a nice launching pad after a big run-up the first half of June. Another breakout could be forthcoming if the market continues to improve. In the meantime, we have a solid gain in this Mexican retail stock. BUY

Las Vegas Sands (LVS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been in the same 57-59 range for the past month but is threatening to break below it this morning, dipping to 56.23 as of this writing. We’ll see where it closes. Having fallen well below its 50-day moving average (though still easily north of its 200-day line), let’s downgrade this casino and gaming stock – a play on China’s reopening – to Hold. MOVE FROM BUY TO HOLD

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, recovered some of its recent losses, vaulting to 338 from 328, shy of its mid-June apex of 348. A reiterated “Outperform” rating from Wedbush – which predicts MSFT could become the first $3 trillion market cap company – helped. And the AI boom, which Microsoft leads thanks to its ChatGPT platform, is showing no signs of slowing. We now have a 33% gain on this stock in exactly four months. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in his Cabot Explorer advisory, bounced off 155 last week and is back near its June highs, though still well off its April highs (172). In his latest update, Carl wrote, “Novo Nordisk (NVO) is the leader in weight-loss treatment as the company currently has two drugs on the market approved for Type 2 diabetes (Ozempic) and obesity (Wegovy) – both of which are injectables. It also has Rybelsus, its pill for Type 2 diabetes. In addition, it has an initiative to begin researching new weight-loss drugs that prevent type-2 diabetes and obesity.” BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, had a very good week-plus since we last wrote, rising 4% to recover about half its late-June losses. Shares of this cloud computing giant are back to our entry point and are up 44% year to date. BUY

Shopify Inc. (SHOP), originally recommended by Tyler Laundon in Cabot Early Opportunities, are about even since we added it to the portfolio a little over a week ago. The company is a cloud-based provider of e-commerce solutions, primarily for small- and mid-sized businesses. Shares are up 82% year to date, with a huge gap up in mid-May, thanks in large part to its AI potential. As Tyler wrote in this space last week, “Shopify is already one of the leading e-commerce companies out there with over 2 million sellers and nearly $200 billion of gross merchandise value (GMV) flowing through its platform in 2022. The company powers around 10% of all U.S. e-commerce.

“There is a lot of room for technology to improve/streamline/personalize things.

“At the top of the list is AI technology that can make it easier for shoppers to find what they want. Shopify is already using AI in its Shopify Magic solution (released earlier this year), which auto-generates product descriptions based on search keywords.

“The company has also released an AI shopping assistant (March 2023) that provides product recommendations and other engagement tools (abandoned cart, etc.) for customers.

“And the new Commerce Components solutions for enterprises, which integrates with Google Cloud AI, is aimed at bringing much larger retailers into the fold.

“For now, these AI tools are mainly aimed at helping Shopify customers drive higher sales and better customer experiences, thereby boosting sales conversions on Shopify’s platform. This is a relatively easy lift at this point. And the technology may help Shopify do a lot more with less overhead.

“Looking forward, I expect to see AI play a larger role on Shopify’s platform, including personalized advertising, human modeling for clothes, retailer storefront design, creative abandoned cart reminders, product recommendations and more.

“It’s hard to see any other e-commerce player, other than Amazon, with more potential to leverage AI than Shopify.” BUY

Si-Bone (SIBN), originally recommended by Tyler Laundon in Cabot Early Opportunities, is down 6% since hitting new 52-week highs in late June. 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, hit new 52-week highs this past week! There was no news. Shares of the streaming audio behemoth have now doubled in 2023, and we have a 10% gain on it in just six weeks. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, rebounded from a down week – and then some. Shares are up 16% since our last issue and are hitting new 2023 highs above 280. It’s the highest the stock has been since last September. Stronger-than-expected delivery and production numbers were behind the surge. 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.

The improved delivery numbers validate the company’s decision to slash prices on some of its signature models earlier this year but is also a product of the Model 3 and Model Y becoming eligible for the $7,500 tax credit under the Inflation Reduction Act.

TSLA shares are now up 128% year to date. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, was down a point this week after hitting new 2023 highs above 44 last week. In his latest update, Mike wrote, “There’s no question Uber’s core ride-sharing and delivery businesses are the key to the company, but we’ve also been impressed with how it’s moving into other areas—in delivery itself, it’s gone beyond just takeout and into things like groceries and even prescriptions; the firm’s good-sized freight business ($1.8 billion of bookings in Q1 alone) could be spun off or sold, which should bring in a chunk of cash; and, last week, the top brass said they’re aiming to roll out advertisements on its apps (both for Rides and Eats) and in-car tablets, which we think could be huge given Uber’s massive user base and their attentiveness (presenting ads when people are looking at what to order for takeout, for instance). Wall Street is beginning to say what we’ve been thinking, which is that even next year’s bullish EBITDA forecast ($5 billion, which translates into $1.25 per quarter—up 64% from Q1’s $761 million EBITDA figure) could prove conservative, which has helped the stock stretch its legs to the upside. We’ll stay on Buy, though some sort of dip or pothole of two or three points wouldn’t be unexpected.” With a 27% gain, we’ll keep UBER at Buy as well. BUY

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, broke out of the 188-190 range to briefly top 200 before pulling in the last couple days. In his latest update, Mike wrote, “It’s not out of the woods yet, but WING has shown some encouraging action of late, including some tightness on its weekly chart (not so coincidentally, that occurred right near the stock’s all-time highs from 2021) and, this week, an attempted push back up through its 10-week line. The firm has been all quiet on the news front since early May, but we remain optimistic that all systems remain go—while same-store sales growth will surely slow, they aren’t likely to keel over from the whopping 20.1% growth rate seen in Q1, and while analysts see sales up ‘only’ 24% in the current quarter, they’ve been drastically undershooting results for a while now. (The fact that the restaurant group as a whole remains strong is also a plus.) Our game plan hasn’t changed here—if this rally runs into a wall of selling, we’ll consider selling and moving on, but having held through the correction, let’s see if the longer-term uptrend can reassert itself going ahead.” We’ll keep holding 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 before pulling back to its traditional 37-39 range. Still, momentum has picked up of late, and the fund is up more than 7% year to date. Our lone ETF offers a high dividend yield and some of the highest-quality emerging market stocks. The fund gives broad exposure with an emphasis on income and value. BUY

Xponential Fitness (XPOF), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, has fallen from grace. More like plummeted. Once the darling of our portfolio – we were up more than 80% on it as recently as May, when we recommended selling about a third of your shares (I hope many of you did!) – XPOF was the victim of a short seller’s report last week, prompting a mass selloff that took shares down from 25 to 15 in just one trading day. Rather than issue an immediate Sell alert, we wanted to hang on for a few days and see if it bounced back. While it has a little, it’s not enough to keep XPOF around in a full portfolio. So, let’s step aside here with what is now a modest loss. MOVE FROM HOLD TO SELL

Any questions or comments? Shoot me an email at chris@cabotwealth.com, or follow me on Twitter @Cabot_Chris.

The next Cabot Stock of the Week issue will be published on July 10, 2023.