Cabot Stock of the Week Issue: June 10, 2024

It’s another big week of inflation data, interest rate angst and a whole lot of parsing words from Jerome Powell and the Fed. This is just a monthly market ritual in 2024 (and 2023, and 2022…), but there’s no need to let it dictate how you invest. Chances are, whatever happens this week won’t alter the direction of stocks much – at least shy of inflation suddenly coming in much higher or the Fed unexpectedly cutting rates already (there’s a 0.6% chance of that, according to the CME Group’s trusty FedWatch tool). We’re not traders; we’re playing the long game in the Stock of the Week portfolio. And that has served us well, as evidenced by the four doubles in our portfolio since the start of 2023, not to mention the 9,000%-plus gain in Tesla (TSLA) in the last 12.5 years.

Continue to focus on what stocks you think have the most staying power over the long term. Today, we take another big swing in that regard, adding a small-cap, Canadian-based rare earths company that was recommended by Carl Delfeld in his Cabot Explorer advisory a while back.

Here it is, with Carl’s latest thoughts.

Neo Performance Materials (NOPMF)

One of the most strategic inputs for a wide array of advanced tech products is permanent magnets – also known as rare earth magnets. They are many times more powerful than regular magnets and allow more fluid movement of motion under great stress and extreme temperatures.

The first rare earth magnets were discovered in the 1960s by scientists at a U.S. Air Force laboratory. From electric vehicles to wind turbines, advanced electronic-warfare systems of F-35 jet fighters, missile guidance systems, to nuclear submarines, permanent magnets are essential.

The age of U.S. dominance of rare earths and rare earth magnets ended in the 1990s and now China accounts for about 90% of global production. Neo Performance (NOPMF) manufactures the building blocks of permanent magnets and powers many modern uses of these technologies and advanced industrial materials. These include magnetic powders and magnets, specialty chemicals, metals, and alloys – all using rare earths and minerals critical to permanent magnets.

Based in Toronto with offices in Denver, Singapore, and Beijing, the company is organized along three segments: Magnequench, Chemicals & Oxides, and Rare Metals. Neo has a global platform that includes nine manufacturing facilities located in China, the United States, Germany, Canada, Estonia, and Thailand, as well as one dedicated research and development center in Singapore.

Neo Performance Materials has also started construction of a manufacturing facility in Europe to produce rare earth permanent magnets with a manufacturing facility in Narva, near its existing rare earth separation plant in Sillamäe.

Neo stock is down 14% this year as rare earth stocks have pulled back due to weak pricing, but prices are now trending up and interest in industrials is also rising. All this offers us a timely entry point for this aggressive stock that trades at 17 times forward earnings, 0.38 times sales, and 48% of book value. Neo also has ample cash and very low debt levels. The stock also offers us an excellent hedge on China/Taiwan risk, a forward 6% dividend yield, and incentives are aligned, with about 20% of the outstanding stock held by management.

Current Recommendations

Changes Since Last Week:
Alexandria Real Estate Equities, Inc. (ARE) Moves from Hold to Sell
American Eagle Outfitters, Inc. (AEO) Moves from Buy to Hold
Core & Main (CNM) Moves from Buy to Sell

Several changes in the portfolio this week, as our mission to trim the portfolio back down to no more than 25 stocks is nearly complete (we’re now at 26). We say goodbye to Alexandria Real Estate (ARE) and Core & Main (CNM), two laggards that stick out like a sore thumb in a portfolio full of mostly winners, both of which turned south in a hurry in the last week. Also, we downgrade strong performer American Eagle Outfitters (AEO) to Hold while Wall Street gets over its disappointment with what was a mostly (though not entirely) solid earnings report last month for the clothing retailer.

On the flip side of the coin, several of our other positions are at new all-time highs, including both weight-loss drug titans (LLY, NVO), CrowdStrike (CRWD) and GoDaddy (GDDY).

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

Updates

Alamos Gold Inc. (AGI), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, dipped below 16 for the first time in nearly a month, as gold and other commodities have lost momentum in recent weeks. There was no news, and gold prices remain elevated above $2,300 (though down from record highs above $2,430); as long as they stay high, AGI and other gold miners should benefit. BUY

Alexandria Real Estate Equities, Inc. (ARE), originally recommended by Tom Hutchinson in the Safe Income Tier of his Cabot Dividend Investor advisory, fell again last week, dipping to its lowest point since February, so it’s time to sell. While this life sciences REIT sounds great in theory – labs, unlike businesses, require office space and thus are always in demand – the stock simply hasn’t performed, and we’re down 11% from our entry point. That makes it the weakest performer in our portfolio. Time to move on. MOVE FROM HOLD TO SELL

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has dipped to its lowest point in four months since reporting earnings that failed to impress Wall Street. Sales came in just shy of estimates, though they marked a 6% year-over-year improvement. Meanwhile, earnings per share (34 cents) outpaced estimates (28 cents) and were nearly four times the 9 cents per share it earned in the same quarter a year ago. So, it appears the selling is overdone. But you can’t argue with the trend – AEO is down 13.5% in the last month and even further off its early-April highs. Because the earnings were mostly good and we still have a double-digit gain on the stock, I’m not going to cut bait yet. But I do think a downgrade to Hold is warranted. If the stock gets sold off much further – or enough to break below the 200-day line (20.43 as of this writing), I’ll likely move to sell. For now, keep holding. MOVE FROM BUY TO HOLD

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, was flat again this week on no news. The U.K.-based life insurance and investment management firm is coming off a very good May in which it recovered most of its April losses, rising from a low of 11.44 to as high as 12.7 per share (it’s now at 12.32). The stock remains cheap, trading at less than 12x earnings estimates, with a price-to-sales ratio of 0.40 and a price-to-book of 1.42. Shares have 13% upside to Bruce’s original 14 price target. And the 6.8% dividend yield certainly helps matters. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has pulled back sharply as the market has stagnated in the last month, falling from 131 to 117. BX is a Bull Market Stock (Mike’s term), which means it tends to outperform the market when times are good. It’s still a bull market, but stocks have encountered some more turbulence of late after a stellar first half of May, and so BX is in a bit of a lull. The bull market is far from over, and BX shares will be back. This dip looks quite buyable if you don’t already own the stock. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was back with a vengeance last week, recovering nearly all its late-May losses and adding 8% ahead of earnings this Wednesday (June 12). Analysts are looking for 40.8% revenue growth with EPS growth of 11%. It’s possible the strong results – and even a beat – are already priced into the share price. We’ll see. Regardless, we now have a 62% gain on AVGO (dividend not included) in exactly 10 months. I’d keep any new buys very small ahead of Wednesday’s report. BUY

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, fell slightly after going nowhere but up for six weeks – a normal and so far quite modest pullback. Here’s what Mike had to say about it: “Cava (CAVA) has been wild since its post-earnings surge (low of 75 the day of earnings, high of 95 a couple of days after) and today saw the stock sink back into the mid-80s after some big insider and closely held shares were put up for sale. Overall, the action is still normal—the 25-day line is below 81—so we’ll stay on Buy, thinking the major uptrend has much further to go and, of course, the long-term growth story is hard to beat given the proven concept and excellent sales/earnings numbers. That said, we’re not complacent and will be watching closely; if you want in, keep it on the small side and/or aim for further dips.” Good advice. BUY

Core & Main (CNM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, totally fell apart on earnings last Tuesday, nose-diving from 57 to 47 after Q1 results unexpectedly declined. At 49 cents per share, Core & Main’s bottom-line results fell short of analyst estimates (51 cents per share) and short of last year’s first-quarter results (50 cents a share). That’s not a good trend, and neither is the 23% tumble in the share price in the last four weeks. So, it’s time to sell. No point in keeping a stock in the portfolio with a falling share price and earnings results. MOVE FROM BUY TO SELL

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, has totally righted the ship, up nearly 9% today, and up 23% since we last wrote, to reach new all-time highs near 380! What turned the tide? A strong earnings report last Tuesday. Here’s what Mike had to say about it: “Honestly, CrowdStrike (CRWD) was looking extremely iffy as of a couple of days ago, with a double top on the chart and some severe selling (a volume cluster on the downside) thanks to the cloud software decimation last week. But the company came through with another outstanding quarterly report Tuesday evening that brought in some buying: Not only did sales (up 33%) and earnings (up 63%) both top estimates, but free cash flow was massive (north of $1.25 per share, vs. 93 cents of earnings; free cash flow margin was 35%!) and annualized recurring revenue also lifted 33%. Shares bounced back, and on the weekly chart, CRWD is bouncing back nicely after last week’s dip on ‘over-the-top’ volume (much higher than the shakeout volume), which usually bodes well.” Mike wrote that last Thursday when CRWD was merely back up near previous levels. Now it’s soaring to new highs. We now have a 133% gain on the stock in just nine months! Given that run-up, and the stock’s general volatility in recent weeks, I would sell up to a third of your original position in CRWD right now, with shares trading nearly $30 above their previous highs. Officially we’ll keep our rating at Hold. But it’s time to book some profits on at least a portion of your stake and let the rest continue to ride. HOLD

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is hitting new highs yet again, rising another 4% since we last wrote. The latest catalyst is related to its proposed mega-Alzheimer’s drug donanemab; this week a panel of advisors to the Food & Drug Administration (FDA) is meeting to discuss the drug, which could mean approval is imminent. If approved, donanemab could be yet another revolutionary drug for Eli Lilly, on top of its already-revolutionary weight-loss drug, Mounjaro, which has catapulted LLY shares into the stratosphere in the last year and a half (along with Novo Nordisk; see below) as sales have exploded. We now have a 160% gain (not including the dividend) on LLY in less than 15 months! As with CRWD above, now is a good time to sell a few shares. If you have not already done so, I recommend selling up to a third of your shares to book some considerable profits. Let the rest ride, as LLY’s run may be far from over. BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, has been on a magnificent tear. Shares have exactly doubled since late October, from 71 to 142 – a new all-time high! We got in at 130 a month ago as Tyler dubbed the stock a “behind-the-scenes AI play” now that it’s launched its new AI-powered Airo solution to help companies and creators build websites. The stock took off after Airo was announced late last year. GDDY has captured Wall Street’s attention enough that the stock will be added to the S&P 500 later this month as part of its quarterly rebalance. It’s now part of the “club” – and is a strong recent addition to our portfolio. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, has been steadily recovering after a rough second half of May, finding a bottom just below 11 a share and now back above 12. There’s been no news, though CEO Ben Kovler did recently express interest in a merger with Boston Beer (SAM), the maker of Sam Adams beer. Perhaps that’s moving the needle a bit for shares. A bigger catalyst would be if/when cannabis rescheduling gains approval; the Department of Justice gave the green light on rescheduling cannabis from a Class I (most dangerous) to a Class III (not very harmful) drug last month, and it’s currently in a 60-day “comment” holding period. The upside for Green Thumb and the entire cannabis sector remains quite high. For now, though, we’ll keep the stock at Hold. HOLD

Honda Motor Co. (HMC), originally recommended by yours truly in the Growth & Income Portfolio of Cabot Value Investor, was down another point, from 34 to 33, and isn’t off to the greatest start since we added it to the Stock of the Week portfolio two months ago on both the promise of its burgeoning stable of hybrid cars and its extremely cheap value. That narrative remains very much in place, especially after another strong quarter in which the CEO singled out hybrids as the company’s “secret weapon.” But the stock remains stubbornly in the 32-34 range, where it’s been for nearly two months. Eventually, I believe shares will catch Wall Street’s attention, as they are now even cheaper, trading at a mere 7.5x earnings and just 64% of book value. But a dip below 32 would be a red flag. BUY

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was up another 4% this week to reach new highs above 416. The maker of the da Vinci robotic surgical system is coming off a strong earnings report in late April and received approval for its new da Vinci 5 system in March. Though full-scale launch won’t come until possibly next year, it’s a potential game changer for the company, and investors have taken notice, pushing ISRG shares up 23% this year. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, kept holding at 49. In his latest update, Tom wrote, “This Business Development Company reported stellar earnings that handily beat estimates. It paid a regular monthly dividend of $0.72 per share in the second quarter, marking a 6.7% increase year over year, as well as a $0.30 supplemental dividend in the quarter. MAIN has also shown resilience in tough markets. The safe and high yield pays dividends every single month with a strong possibility of supplemental dividends over the course of the year as well. The current yield is reflected above as 5.9% because I only include the regularly scheduled dividend. Including the supplemental dividends, the yield is 8.3%.” BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, is back up near its highs, rising 3.5% after a short-lived dip. The company’s position as a leader, along with Nvidia, in the artificial intelligence arms race has essentially given the stock a very high floor – and a new coat of varnish for one of the most established tech companies (and the largest by market cap) in the world. Oppenheimer analyst Timothy Horan recently raised his price target on the stock to 500, saying that its partnership with ChatGPT creator OpenAI has helped create the “premier AI platform.” “We see this as a positive and sustainable partnership, which gives OpenAI access to the best AI infrastructure, critical data, and funding, and Microsoft exclusivity to the best AI model,” he said in a client note. Microsoft’s partnership with OpenAI and its industry-best large language models are a major reason why shares have nearly doubled since the start of 2023, and why MSFT should be part of any long-term portfolio. BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, also bounced back nicely after a down week, up about 1.5%. There was no news. Coming off another very strong quarter (sales up 14.8%; EPS up 78.7%), Netflix continues to assert its dominance as the top video streaming service in the world. Like MSFT, it’s a long-term buy for any portfolio. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, has risen to new all-time highs along with its weight-loss drug partner-in-crime Eli Lilly! Shares were up 6%, pushing through resistance at 135 to reach 143. There was no major news, but the GLP-1 (weight-loss/diabetes) drug momentum remains unstoppable, and Novo offers perhaps the most recognizable drug of the group, Ozempic (it also sells Wegovy). Like LLY, NVO shares have more than doubled since we added the stock to the portfolio. As long as demand for Ozempic and Wegovy continues to soar, there’s no limit on where NVO shares can go. BUY

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, had a nice first week in the portfolio, bumping up from 41 to 43. Here’s what Mike had to say about On Holding in his latest update: “We’re optimistic we have a good-sized stake in a fresh leader, both technically (shares recently got moving on earnings, and bigger picture, this was coming out of a year-long rest period) and fundamentally (just over $2 billion in revenue compared to $50 billion or so from Nike). Of course, there are no sure things in the market, and a drop back below 35 (failed breakout and crack of the 50-day line) would tell us big investors are dumping—but so far, the evidence looks enticing. We’ll stay on Buy; near-term dips of a point or two should make for decent entries.” BUY

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, fell from 116 to 113, as the stock’s yo-yo behavior depending on the temperature of interest rates raged on. In his latest update, Mike wrote, “Like so much out there, a couple of very good days could have the stock testing new high ground. That said, our antennae are up as the stock (and the group) hasn’t responded at all to the recent sharp dip in interest rates; frankly, some housing supply stocks are looking pretty bad. Now, you can always find something to worry about, and we view this more as a heads up—having already taken partial profits, we’re fine giving PHM more rope. But we’d expect PHM to find support relatively soon if the stock and the group remain in gear.” Keeping at Buy for now. BUY

Qualcomm, Inc. (QCOM), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was up 2% but has been trading in an increasingly narrow range the last few weeks. In his latest update, Tom wrote, “It looks like the end of the recent surge, which was inevitable at some point. QCOM pulled back 7% from the recent high. It soared nearly 40% at its high between April 19 and last week. Earnings beat estimates and the company raised earnings guidance for 2024. But the real excitement is the growing talk about artificial intelligence coming to smartphones, and Qualcomm as a major beneficiary of the upgrade cycle. Several analysts are contending that an AI-driven super cycle is coming soon. Qualcomm is at the leading edge of chips that enable AI for smartphones and PCs and should benefit mightily.” BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is back up to 73, recovering all its losses from a couple weeks ago when it briefly dipped to 68. As Carl noted, “There is evidence from bookings of a turnaround in its important Garena gaming arm. Investing in live streaming about a year ago led Shopee’s e-commerce platform to become the largest live-streaming e-commerce platform in Indonesia, a country of 265 million people.” As a play on Southeast Asian growth and trading at just a fraction of its 2021 highs, this Singapore-based company is one of our highest-conviction long-term buys. BUY

Super Micro Computer (SMCI), originally recommended by Carl Delfeld in his Cabot Explorer advisory, bounced nicely after a miserable first couple weeks in the portfolio, jumping from 750 to 790 as AI stocks got a bump, riding Nvidia’s coattails after its huge quarter. The stock is now up 179% year to date and is still trading closer to its April lows than its March highs near 1,200. The company is building an AI data center in Japan with Apple, and revenues are expected to grow by 122% this year, so there’s a lot to like, and this could be an ideal entry point. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, keeps hovering in its newfound comfort zone in the 170s as the company awaits a shareholder vote on whether Elon Musk should receive his record-setting $52 billion pay package that was struck down by a Delaware judge earlier this year. The vote will come Thursday, so the stock is likely in even more of a holding pattern than it already was prior to this Musk pay dispute taking center stage. Regardless of the outcome, I doubt it will move the needle much for TSLA shares given how stubbornly planted in place they’ve been the last couple months. The only catalyst that’s likely to get people to start buying Tesla shares again is better sales results and improving margins after three straight quarters of backsliding in both categories amid increased global competition. We won’t have any new numbers for a few weeks, so expect TSLA shares to keep marching in place until then. HOLD

Uber Technologies (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, finally got off its knees after months of backpedaling and/or stagnation, bouncing off 63 support to reach as high as 69, though it’s back down to 67 today. In his latest update, Mike wrote, “Uber (UBER) has shown a little life the past couple of days, with today’s pop mostly thanks to a bullish multi-year view from peer Lyft. We’re not popping any champagne, of course, as shares have only tagged their falling 50-day line from below. Even so, it’s a start, and while the decline has been tedious, it hasn’t violated longer-term moving averages and we believe the free cash flow story here is as good as ever, so we continue to hold a chunk of shares looking for the longer-term uptrend to resume.” We will keep holding as well. HOLD

United Airlines (UAL), originally recommended by yours truly in the Growth/Income Portfolio of Cabot Value Investor, was up another point, from 52 to 53, as the company is launching the airline industry’s first media network. Called Kinective Media, it will use traveler behavior to create more personalized ads and content for passengers watching streaming content on one of its seatback screens. It’s the first of its kind and could provide United with a whole new revenue stream given its potential appeal to marketers. With summer travel just getting started and the stock trading at a microscopic 5x earnings, UAL stock presents a very enticing combo of growth and value. BUY

UnitedHealth Group Inc (UNH), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, has been up and down of late since reporting earnings in late May. Here’s what Tom had to say about it: “The stock reversed its negative course after earnings put fears about the hacking to rest. UnitedHealth reported earnings last month that soundly beat expectations with an 8.6% revenue rise and a better than 10% increase in adjusted earnings from last year’s quarter. The company also issued strong guidance. The stock rose about 20% after the report but has since given some back. The stock was under pressure last week after management raised a red flag about Medicare reimbursement rates, but the stock has regained its footing since.” 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. Tom Hutchinson was our guest this past week to discuss all things dividend stocks.

The next Cabot Stock of the Week issue will be published on June 17, 2024.

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