Cabot Stock of the Week Issue: July 9, 2024

The second half of the year picked up right where the first half left off: With stocks at all-time highs, and with the Magnificent Seven and a handful of other artificial intelligence stocks doing most of the heavy lifting. Jerome Powell’s comments to Congress today signaled that the Fed may be closer to cutting rates and that “more good data” could help get them there. The rally remains relatively thin – the Equal Weight S&P 500 index is flat this month, though the Dow is starting to get some traction – but it’s possible it could spread to other sectors as rate cuts draw nearer.

In the meantime, let’s stick with what’s working. And that’s not just AI and mega-cap tech. Other tech stocks are feeling the love of late, and that includes a space-related company whose shares have exactly doubled this year – and yet the stock trades 40% below its early-2021 peak. It’s a stock Tyler Laundon recommended to his Cabot Early Opportunities audience last month.

Fair warning: It’s a small-cap stock with no earnings and very little revenue (so far), so this is a highly speculative play. Start with a small position, and know that it’s only for investors with some appetite for risk. But with the market at all-time highs and rate hikes potentially on the very near horizon, now is not a bad time to take some risk.

Here’s the stock, with Tyler’s latest thoughts on it.

AST SpaceMobile (ASTS)

AST SpaceMobile (ASTS) is a pure-play, low-earth orbit (LEO) broadband communications company. It’s been a fast-moving stock lately and is only suitable for risk-tolerant investors. We’ll start with a half-sized position so we can average down if shares pull back and it makes sense.

AST is on a mission to build the world’s first space-based cellular broadband network that can provide uninterrupted smartphone coverage across the globe.

This is a potentially huge market given that over 40% of the global population lacks cellular broadband and 90% of the earth’s surface has no cellular coverage at all.

AST’s most direct competitor is Starlink, a SpaceX subsidiary that has deals with T-Mobile in the U.S.

The company’s network is called SpaceMobile, and in the not-too-distant future, you may just tap a few buttons on your cell phone to connect. It’s designed so ordinary mobile phones can connect at 4G/5G speeds whether on land, at sea or in flight.

The company’s satellites operate similarly to cell towers, just at a different scale. They have a large surface area of phased-array antennas that work together to electronically form, steer and shape wireless communication beams into cells of coverage.

Mobile phones and other cellular devices connect to the satellites via frequencies that are shared with wireless customers.

AST currently has the BlueWalker 3 test satellite in space. In September of last year, it worked to connect calls from Hawaii to Spain via the AT&T (T) spectrum.

The company is working with major mobile network operators and wireless ecosystem players, including AT&T, Vodafone (VOD), Orange (ORAN), Google (GOOG), American Tower (AMT) and Bell.

Its business plan is to work with these operators, which have over 2.8 billion existing subscribers, under a revenue share model designed to allow users to sign up with a simple text message for a day pass, a monthly rate, an emergency connection or an IoT connection.

To date, AST has raised over $1.2 billion. This includes a strategic investment of over $200 million in January 2024 from new investors AT&T and Google, as well as a follow-on investment from Vodafone.

The company has an agreement with AT&T to provide space-based cellular broadband through 2030 under the revenue share arrangement. It also has a contract with the U.S. government.

Just recently (May 29), AST announced a strategic partnership with Verizon (VZ) that includes a commitment of $100 million ($65 million of commercial prepayments and $35 million of convertible notes). Verizon customers will get direct-to-cellular AST SpaceMobile service when needed over 100% of the continental U.S.

Looking forward, AST expects to launch its Block 1 (five BlueBird satellites) from Cape Canaveral shortly after they are delivered in the July – August time frame. This will be an exciting event, hopefully without any explosions. Block 2 satellites are expected in late 2024 to early 2025.

That all said, FCC approval is still needed. While expected, this is clearly a major milestone.

In terms of estimates, things are evolving quickly here so there is a wide range of potential outcomes, largely dependent on getting satellites into orbit. At the moment, it’s reasonable to expect around $50 million in 2024 revenue (was $0 last year) then upwards of $260 million in 2025.

AST won’t be profitable for a while and is likely to need to raise capital. Management has stressed its preference for strategic partnerships over dilutive equity financing. That said, management believes it has enough cash ($212 million at the end of Q1, before the Verizon deal) for the next 12 months.

As for the stock, ASTS came public at 10 via SPAC IPO in late 2020 and initially did well, then suffered the fate of many SPAC IPOs (and other stocks) as the bear market took over. Over the next three years, there were lots of head fake rallies that lasted for a few months. ASTS hit a floor near 2 just a couple months ago (April 2) following the Q4 2024 earnings release. The trend changed following the AT&T agreement and Q1 earnings report (May 15). ASTS doubled, then traded between 4 and 6 until the Verizon partnership was announced (May 29), which sent shares to 9. Over the last month, ASTS has climbed to around 12. This story has gone from super speculative to considerably less so given material commercial progress. That said, expect a wild ride with the stock – there’s still a lot of business development to do and the short-term trajectory is very uncertain, despite the massive long-term upside potential. BUY

Current Recommendations

Changes Since Last Week:
American Eagle Outfitters (AEO) Moves from Hold to Sell
PulteGroup (PHM) Moves from Hold to Sell
Tesla (TSLA) Moves from Hold to Buy

Lots of movement today. We sell two laggards in AEO and PHM, both of which earned us a tidy 17% profit. Each started out of the gates hot after we recommended them, but have since stalled out or pulled back for months on end. So, with the addition of ASTS, that cuts our portfolio size back down to 26, close to our desired cap of 25.

On the other end of the spectrum is Tesla, which gets upgraded to Buy for the first time in months on the heels of 10 straight up days in response to a promising (and much-needed) second-quarter deliveries report.

A few of our other stocks made some nice headway during the holiday-shortened week as well. Let’s get into all of them.

Updates

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, dipped below 19.8 for the first time all week last week. And while it has since bounced right back up to 19.8, this retail stock just doesn’t seem to be in favor these days and has fallen from the mid-24s in the last two months. Let’s step aside here and open up a spot for something with a bit more momentum. And we’ll pocket the nice 15% profit in just over eight months. MOVE FROM HOLD TO SELL

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, keeps holding in the low to mid-12s, where it’s been since flirting with new highs above 12.7 in May. Any break above that level would be bullish. Shares of this U.K.-based life insurance and investment management firm remain cheap, trading at less than 12x earnings estimates, with a price-to-sales ratio of 0.40. Shares have 13% upside to our 14 price target. The 6.8% dividend yield adds to our strong total return thus far. BUY

BellRing Brands, Inc. (BRBR), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up another dollar, from 58 to 59, though it keeps meeting resistance just above 60. There was no news. BellRing is a mid-cap, protein-focused packaged food company that sells two groups of products: ready-to-drink (RTD) protein shakes under the Premier Protein brand (83% of 203 revenue) and protein powders under the Dymatize brand (14% of revenue). It’s growing fast, with sales up 21% in 2023 and earnings per share up 14%. Those numbers were even better in the second quarter, up 28% and 88%, respectively. Revenue is expected to grow another 18% this year, with EPS up 34%. That’s some impressive, consistent growth. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, reports earnings on July 18. We’ll hang in there until then because a) this is a “Bull Market Stock” (Mike’s term) and it’s still a bull market, and b) the stock has been wandering aimlessly between 116 and 125 for the last six weeks, and it’s possible earnings will be just the thing to catapult BX out of its recent range. Keeping at Buy for now, though a dip below that 116 support before or after earnings may prompt me to reevaluate. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, is back on the uptick, advancing 7% in the last week to within shouting distance of its June highs above 1,800. A 10-for-1 split is coming next Monday, July 15, which means the share price will soon be in the 100s. That may make it more attractive to retail investors, but I doubt it will move the needle a whole lot. Broadcom already has plenty of institutional support, with nearly 80% held by hedge funds, etc. As a result, the stock is up 56% year to date and has nearly doubled since we added it to the portfolio 11 months ago. Book some profits if you got in early after our recommendation last August. Officially, however, it’s still a Buy. BUY

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, finally broke out of its 90 to 93 range, though just barely. It has now set up shop at 94-95. In his latest update, Mike wrote, “Cava (CAVA) is in the same position it’s been for the past few weeks—unable to get through resistance in the mid-90s, but also unwilling to give up much ground as it holds near its 25-day line. Given the environment, we can’t rule out a dip if resistance doesn’t get taken out; the 50-day line (and the late-May low) is in the 82 area and rising, so there is daylight should any wobbles occur. Big picture, though, the pieces remain in place for this cookie-cutter story to attract more big investors—the early read on Q2 fund ownership shows 387 now own shares, up from 301 in March and 224 in December. We’ll stay on Buy, but new buyers should keep it small for now or look for dips.” BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, is at the high end of its recent range, trading at 390. In his latest update, Mike wrote, “CrowdStrike (CRWD) caught a valuation-based downgrade yesterday, with the analyst seeing no near-term catalysts after the recent big run; these sorts of actions usually don’t dent strong stocks much, and indeed, CRWD is still hovering near its highs. We do like the tight trading here over the past three weeks, a sign that big investors are comfortable holding shares at these levels. We’ll stay on Hold here, partly due to the choppy market, but could restore our Buy rating in the days ahead if the stock continues to act well.” We’ll keep CRWD at Hold as well, sitting on our 139% gain in 10 months. HOLD

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, stretched to new highs above 920 this morning and has essentially been on the rise for two straight months. In his latest update, Tom wrote, “It’s another week and another new high. I don’t know what to say about LLY anymore. This superstar pharmaceutical company stock is up 55% YTD. The catalyst for the latest surge is good news from its Alzheimer’s drug Donanemab. The drug got a very favorable report from the FDA panel, which has a huge input on whether a drug is approved or not. The report was practically a rave. Between the need for the drug, the prior approval of Novo Nordisk’s (NVO) inferior drug, and the panel nod, it is now a near certainty the drug will gain FDA approval, and probably soon.” We now have a 180% gain on this stock in less than 16 months. If you have not yet taken some profits, I recommend doing so now, with the stock having gone nowhere but up for two months. Officially, however, we’ll stay on Buy. BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, inched its way to new highs above 143. There was no news. The stock joined the S&P 500 (along with CrowdStrike) on June 24 and has continued to tick upward since. Tyler calls this stock a “behind-the-scenes AI play” thanks to its launch of Airo, an AI-powered solution to help companies and creators build websites, late last year. GDDY shares have soared since. And now they’ve broken above temporary resistance at 142. 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. For now, 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, held its gains in the last week and remains at its highs around 446. The company reports earnings on July 18. Coming off a strong first quarter, we’ll see if the maker of the da Vinci robotic surgical system (with a new version, the da Vinci 5, coming) can keep up its recent momentum. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, was up from 50 to 52 – a new all-time high! There was no news for this business development company that pays a high yield (roughly 8%). It’s been a steadying force in our portfolio, and we have a solid return to show for it. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, just keeps hitting new highs, up from 450 to new turf above 465 in the last week. There’s been no major news, though the company does report earnings at the end of this month. Right now, MSFT is benefitting from – and helping create – the relentless AI tailwind. Shares are up 23% year to date, and we have an 80% gain thus far. Microsoft’s partnership with OpenAI and its industry-best large language models are a major reason why, and why MSFT should be part of any long-term portfolio. 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, was up 3.5% this past week and is flirting with a new all-time closing high above 690, potentially eclipsing the October 2021 highs. The catalyst was a price target hike by TD Cowen, which bumped its target from 725 to 775 ahead of the second-quarter earnings report on July 18 – which perhaps bodes well for those results. Analysts are looking for 7.5% revenue growth with a whopping 33% EPS growth. Netflix has beaten bottom-line estimates in three of the last four quarters. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, pulled back from 145 to 140 but is still holding above recent support at 139. A new study found that patients on Eli Lilly’s Mounjaro lose weight faster than those on Novo’s Ozempic. The study, which analyzed more than 18,000 obese or overweight patients, found that after 12 months patients who were on Mounjaro lost 15.3% of their body weight vs. just 8.3% for those on Ozempic. That’s a significant difference considering the high cost of weight-loss drugs in the U.S. We’ll see how the study impacts sales going forward and NVO shares in the coming days and weeks. For now, they’re still in their normal range from the past month, so no real damage done yet. The stock has still more than doubled since we added it to the portfolio 18 months ago. BUY

Ollie’s Bargain Outlet (OLLI), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, held firm at 98 in its first week in the portfolio. There was no news.

Here’s part of what Mike wrote about it last week: “Ollie’s is one of the nation’s largest retailers of closeout merchandise and excess inventory, selling everything from food, housewares, cleaning supplies, clothing, toys and much more, offering discounts of up to 70% compared to fancier store prices. That’s a strong selling point in the wake of tighter budgets as inflation has struck and as price hikes continue to linger in some categories, and this was made clear in the company’s Q1 earnings, which saw cash-strapped shoppers taking advantage of Ollie’s many bargains. Revenue of $509 million rose 11% from a year ago, thanks in part to a 3% comparable-store sales increase, while earnings of 73 cents lifted 49% (and beat estimates by eight cents). Adjusted EBITDA increased 40%, to $69 million, while margins and expenses were better than expected. The company attributed the solid results to consumers remaining ‘under pressure,’ while also ‘seeking value in their purchases.’”

The stock shot up after the early-June earnings report, rising from 82 to as high as 99. It has since been a holding pattern, but chances are the next major move will be up, given the growth. BUY

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, was down from 39 to 38. In his latest update, Mike wrote, “On Holding (ONON) continues to weaken, dipping below its 50-day line, so we’ll put the stock on Hold, using a mental stop in the 34 to 35 area for now (near the prior high). Nike’s quarterly report last week didn’t help the cause—that stock imploded 20% last Friday and hasn’t been able to get off its knees. On, of course, is a different animal (an analyst actually hiked his price target today), so we’re OK giving it a chance, but if all’s well ONON should find buyers soon.” Since we added ONON later than Mike, we’ll keep it at Buy. But if we don’t see some movement soon, we may be inclined to downgrade it to Hold as well. BUY

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, just hasn’t gotten the job done of late – it topped out at 122 in mid-May and has now dipped below three-month support at 105 – so it’s time to say goodbye to PHM while we still have a modest gain. Mike sold the stock last week citing the lack of momentum despite a decent pullback in interest rates. It’s possible the stock will take off again if and when the Fed finally cuts short-term rates. But with no movement in four and a half months, it’s taking up valuable real estate (pun intended) in our portfolio. Time to sell. MOVE FROM HOLD TO SELL

Qualcomm, Inc. (QCOM), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, has bounced back nicely after falling from highs above 227 to 195; it’s clawed its way back to 208. The rally likely isn’t over, as Tom writes: “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.” BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is right back up near its 52-week highs above 76 after a brief detour when the stock pulled back below 70 after an analyst downgrade. JPMorgan downgraded its SE rating from a “positive overweight” to a neutral and lowered its price target to 78 from 84, citing increased competition in the e-commerce space, where Sea Limited’s Shopee business dominates in Southeast Asia. Pinduoduo’s Temu platform is growing in popularity and has emerged as a serious rival. Fortunately, Shopee is just one of Sea’s three core businesses, along with SeaMoney (fintech) and Garena (online gaming), which has a massive user base of nearly 600 million. Besides, JPMorgan’s concerns were mostly theoretical, and it seems as if Wall Street thinks so too. The stock trades at just a fraction of its 2021 highs and is an excellent way to play Southeast Asian growth. BUY

Super Micro Computer (SMCI), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has added 125 points (+16%) since we last wrote as this ever-volatile late-blooming AI play keeps ping-ponging around. SMCI is almost like a leveraged play on the AI boom; when AI stocks pull back, as they did in June, SMCI falls even harder. When AI stocks are on the rise, however, as they are now again in July, SMCI leads the charge. As long as artificial intelligence remains in favor, SMCI is worth holding on to. But it’s not for the faint of heart. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is officially BACK! After trading below 200 a share for most of 2024, TSLA shares have exploded above 260 in the last 10 days after the company reported stronger-than-anticipated Q2 deliveries. The EV maker delivered 443,956 cars in the second quarter, more than the 439,302 that were expected. That’s not much of a “beat,” but it was a beat nonetheless – a welcome change from the last three quarters of misses and underwhelming earnings results. Deliveries were also up significantly from the 386,810 delivered in the first quarter – though down from the 466,140 delivered in Q2 a year ago. In the short term, it’s likely the buying is a bit overdone – the stock is on track to rise for a 10^th straight day on Tuesday – so there’s bound to be a pullback of some kind soon. But with the full earnings report right around the corner (July 23) let’s finally restore our Buy rating, with the caveat that you should only do so on dips. Big picture: The last 10 days are exactly why Tesla remains in the Stock of the Week portfolio nearly 12.5 years after it was recommended, and why it will stay there for the foreseeable future. It should be in yours too. MOVE FROM HOLD TO BUY

Uber Technologies (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, is essentially flat in the last week and really hasn’t budged much in the last month. In his latest update, Mike wrote, “Uber (UBER) saw some sloppy action the first couple days of the month, but it generally held near-term support (69-70) and still has a chance to round out its launching pad. As we wrote last week, the stock obviously still has a lot of proving to do, and Tesla’s Robotaxi unveiling next month could move the stock. But the underlying story and numbers here are hard to beat, and we’d be intrigued by any decisive show of strength. Continue to hold your remaining shares.” Let’s do the same. HOLD

United Airlines (UAL), originally recommended by yours truly in the Growth/Income Portfolio of Cabot Value Investor, was down from 48 to 47 and has been in slow decline from 53 in the last month. There’s been no news, and thus no good reason for the decline. The airline reports earnings on July 17, so perhaps that will stop the seemingly unwarranted bleeding. UAL shares remain dirt cheap at less than 5x earnings; with 7.3% revenue growth forecast this year, I think that’s a good recipe for a turnaround. BUY

UnitedHealth Group Inc (UNH), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, gave back a portion of its 4% gain from the previous week. Earnings are due out a week from today, on July 16. Perhaps a strong report will help it find some direction. UnitedHealth is a mega-cap play on the aging of the population and pays a solid dividend to boot. BUY

United States Steel Corporation (X), originally recommended by Matt Warder in his Cabot Turnaround Letter, added another 2% and is off to a promising start since we added it two weeks ago. Part of the premise here is that there’s a very near-term catalyst for a turnaround, as Japan’s Nippon Steel is attempting to acquire it. Matt provided the latest on where the deal stands: “U.S. Steel (X) addressed concerns brought by an activist shareholder of potential acquirer Nippon Steel saying the takeover would increase decarbonization costs. The company is in the process of ramping up recycling facility Big River Steel which will replace a portion of traditional, carbon-intensive blast furnace capacity.” So far, so good. U.S. Steel is a Buy, and you might want to do so quickly before Nippon Steel swoops in and buys it. 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 15, 2024.

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