Cabot Stock of the Week Issue: June 12, 2023

It’s a bull market.

This is the first time in a year that we can say that, although it’s felt at least twice that long, as the decline in the S&P 500 began nearly 18 months ago and it was more like 20 months ago in the Nasdaq. But, at long last, the new bull has arrived. Yes, there are caveats – the breadth of this rally has been super narrow, with about seven or eight mega-cap tech stocks doing most of the heavy lifting until recently. But with the surge in artificial intelligence stocks, and other tech-related sectors starting to show signs of life, we’re seeing more participation than we’ve seen since late 2021. And that means it’s time to keep our foot on the growth pedal – even in the face of this week’s CPI (Tuesday) and PPI (Wednesday) data releases and the latest Fed decision on interest rates coming Wednesday afternoon (odds are up to 75% that they’ll “pause,” according to CME Group’s FedWatch tool).

So today, we add a promising growth stock from Mike Cintolo for a second straight week. It’s an emerging leader in a neophyte but fast-growing niche tech sector, and the stock is already up more than 60% year to date. Mike just recommended the stock to his Cabot Growth Investor audience and here are his latest thoughts on it.

DoubleVerify (DV)

If you’re a student of market history like I am, you know that tons of former market leaders fall into the “follow-on” category, which can generally mean two things. First, there are stocks that follow prior leaders in the same sector, with a newer/better/faster/cheaper option; a good example of this was back when Costco took the warehouse store model popularized by PriceSmart, generally improved it, and used it to grow many-fold during the 1980s and 1990s.

But then there are follow-on opportunities that stem from a boom in a (usually new) industry that in turn spawns other businesses to pop up. The classic example here is the relation between flights and hotels—when passenger flights began to boom decades ago, so too did the demand for places to stay, which resulted in a whole new batch of winners.

DoubleVerify fits in this latter category, with a big-picture story that makes a ton of sense. That story starts many years ago, as advertising began moving from newspapers and mailings to digital—and of course, digital ads have boomed in recent years as the amount of content, the number of people and the number of connected devices have done the same. No secret there.

However, as that happened, advertisers have relied on incomplete self-reported data from publishers, social channels and programmatic platforms for insights on their ads, which isn’t ideal, especially given the increasing amount of fraud and iffy content that’s online. And that in turn has led to the need for unbiased, effective third-party ad verification services—and that’s where DoubleVerify comes in.

The firm is one of the leaders in this newer field, offering the most comprehensive platform that gives advertisers a real-time look into whether their ads are shown in a brand-suitable environment (not next to objectional content, etc.), are fully viewable in the right geography (an East Coast operation doesn’t want to pay for ads seen by people in Colorado), are viewed for at least a couple of seconds (the industry standard; 30% of display and video ads are never seen!) and, of course, aren’t subject to ad fraud. And the platform applies to direct and programmatic ad buys across all key channels (connected TV, social, in-app, etc.).

A big advantage here is that, due to DoubleVerify’s unique position in the industry, it’s able to collect, analyze and use to its benefit a ridiculous amount of ad data—the company says it measures more than 11 billion ad transactions daily (!), which it uses to boost the effectiveness of its platform and launch new offerings.

All told, then, the platform allows clients to drastically increase the effectiveness of their ad spending, both by avoiding fraud and wasted spend and focusing on ads that are working. So, it’s no wonder many are beating a path to the company’s door—DoubleVerify serves more than 1,000 clients in tons of different industries, including names like Adobe, Home Depot, Amazon, Fidelity, Facebook, Marriott, Apple, Pfizer, AT&T, Best Buy, Infinti, and Gap. And once they sign up, they stick around (gross retention is north of 95%, with 100% retention of its top 75 clients each of the past four years) and spend more (same-customer revenue growth generally north of 20% on average). A plus here is that DoubleVerify gets revenue from advertisers based on the volume of media transactions measured, so it’s leveraged to the growth of the digital ad activity of its clients.

As for competition, there is some (Integrated Ad Science, symbol IAS, is a thinner name that acts well), but DoubleVerify is the leader—and besides, there’s tons of opportunity. Probably our favorite metric of all is that, of its new client wins, two-thirds don’t have any ad verification service currently! (The firm also says it has an overall win rate north of 80%.) Thus, there’s no reason growth can’t be solid for years to come: In 2023, revenues and EBITDA should both increase in the 20% range, give or take, though that could prove conservative if the economy remains resilient.

As for the stock, DV came public in mid-2021, collapsed into last May, and then rallied into October before coming under pressure again. But from there, the stock built a solid launching pad, and after a good-sized shakeout in early May, the stock has turned up and broken out on the upside. Buy on dips.

Current Recommendations

Changes Since Last Week: Wingstop (WING) Moves from Buy to Hold

Only one change this week, and it’s a downgrade of Wingstop (WING) after some recent selling of the wings-centric fast-food chain. But we have no sells, which means with the addition of DoubleVerify (DV) our portfolio is officially full again at 20 stocks. So next week, something will have to go. And barring another inflation- or Fed-induced collapse this week (not totally out of the realm of possibility), that’s sure to be a difficult decision, as most of our stocks are acting well, and several of them continue to hit new 52-week highs. The most impressive stock of late, however, has been Tesla (TSLA), our flagship holding, which is not hitting 52-week highs but has been on a tear for the past month thanks to improving sales in China and landmark Supercharger deals with Ford and GM.

More on that below. Here too is what’s happening with all our stocks.

Updates

Brookfield Infrastructure Corporation (BIPC), originally recommended by Tom Hutchinson in Cabot Income Advisor, is hitting new 52-week highs! The stock is only up a dollar since we last wrote, but it broke above month-long resistance in the mid-47 range to reach its highest point since last September. In his latest update, Tom wrote, “The infrastructure company is up over 12% since the beginning of May while the market is only up 3% over the same period. 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.” BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, just broke above 65 for the first time since early February after unveiling a new brand of electric vehicle. Called Fang Chen Bao, which in Chinese means “Formula” and “Leopard,” the new brand features sports utility vehicles and off-road trucks, and BYD is expected to release the first one later this year. It continues the momentum for a company that sold 996,476 cars through the first five months of 2023 – nearly double the number it sold at this point last year. BYDDY shares are now up 15% since we added it to the portfolio six weeks ago, and I think its run is just getting started. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, remains in a range between 39-41. There was no recent news. Shares have 14% upside to Bruce’s 16 price target. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, has held steady since hitting new all-time highs above 440 a week ago. In his latest update, Tom wrote, “This is another star portfolio performer that has returned 50% in the last year and over 200% since being added to the portfolio less than three years ago while the S&P 500 has returned just 32% over the same period. The pharma superstar has two potential mega-blockbuster drugs up for approval later this year or early next as well as solidly growing earnings for the foreseeable future. But the stock tends to pull back after big surges and half of the position was sold to lock in some of the recent profits in an uncertain market. But LLY is hanging tough so far.”

Last week I advised selling a few shares if you got in right after we added the stock in early March. If you don’t fall into that category, it’s a Buy. BUY

Green Thumb Industries (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, continues to recover, up 3.5% in the last week. There’s been no news that moves the needle in the cannabis sector, with momentum toward passing the SAFE Banking Act seemingly stalled, but Green Thumb – the largest U.S. cannabis company – still looks like a bargain. BUY

Kimberly-Clark de México (KCDMY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is up more than 5% since we last wrote and 10% since bottoming at 10 per share in late May. Still shy of its early-May highs (11.4), there’s plenty of upside here, and we are now back in the black on it. BUY

Las Vegas Sands (LVS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been in the 57-58 range all month. A break above 59 would be bullish. With the market shaping up and the stock well below its highs for the year, chances are the next move will be up. Buy now if you haven’t already done so. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, had a rare down week, tumbling 2.8% after hitting new 52-week highs. It seems AI-related stocks may finally be hitting the pause button, and Microsoft has the second strike of being one of the seven or eight mega-cap tech stocks that carried the market through the first five months of the year, so there may be some consolidation on two fronts. I view it as a buying opportunity. Artificial intelligence isn’t going anywhere, and neither is Microsoft’s leadership position in it. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is holding steady above 157 support after a sharp retreat in late May. In his latest update, Carl noted, “The company announced phase 3 trial results for an oral version of Wegovy to match Pfizer and the company expects $40 billion of revenue in 2024 across its drugs for diabetes, obesity, rare diseases, and cardiovascular disease so we will keep this a hold as Pfizer and other competitors encroach on this lucrative market.” For us, it remains a Buy as long as the stock holds above 157. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, didn’t get off to the greatest start, falling 3.4% in its first week in the portfolio. There was no real reason for the selling, aside from the general slowdown in AI-related stocks over the last couple weeks. In fact, NOW just got an analyst upgrade from Piper Sandler’s Rob Owens, who bumped his price target to 600 from 525 and reaffirmed his “Overweight” rating. The company’s new partnership with Nvidia to develop generative AI for corporations – namely their IT departments, customer service branches and human resources – has been a big driver of NOW’s recent success, and why Mike likes it. As he noted in this space last week, “Just since the start of May, the company has acquired G2K, an AI player that connects real-time, in-store data across storefronts; launched an AI-powered employee talent system that should help firms tailor skills management to their workforce’s needs and strengths; and, most importantly, it inked a partnership with Nvidia to use that firm’s infrastructure to build enterprise-grade generative AI capabilities into its suite of software, ideally boosting productivity of IT professionals. There’s also been a tie-in with Microsoft Azure OpenAI service.

“While it’s hard to quantify, Wall Street’s hopes are high that these and future new AI-related offerings will add some juice to an already-strong growth story.”

In other words, don’t sweat the stock’s decline right out of the gates. BUY

Si-Bone (SIBN), originally recommended by Tyler Laundon in Cabot Early Opportunities, is hitting new 2023 highs near 28! 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, gave back most of its gains from the previous week and is in a range between 147-156. The stock is still up 89% for the year, so an extended pause makes sense. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has gone nowhere but up for the past month! While still well shy of its 52-week highs (309), TSLA is now comfortably above its 50- and 200-day moving averages and is riding the highs of the strides the company is making in China (punctuated by Elon Musk’s recent visit to China) but may be drawing even more strength from its new partnerships with Ford and GM to expanding America’s EV charging capabilities. The deal will open up 12,000 of Tesla’s Supercharger locations to the two automaker giants. Wedbush analyst Dan Ives estimates that the Ford and GM partnerships could generate an additional $6 billion in revenue for Tesla over the next few years. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, keeps hitting new 52-week highs! There was no news. In his latest update, Mike wrote, “Uber (UBER) has certainly jumped around with the market of late, but at day’s end, it’s one of many names that has remained north of its 25-day line, with today’s snapback from yesterday’s dip a good sign. We think the overall resilient economy and long-term growth trends here should keep bookings at healthy levels, and management seems to have found the elixir to boost margins and free cash flow. A drop below 35 would be iffy, but we averaged up on Tuesday and the path of least resistance is up.” BUY

UnitedHealth Group (UNH), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was down 1.8% in the last week but is still well above its May lows. In his latest update, Tom wrote, “UnitedHealth has strong predictable revenues in a very defensive business ahead of a possible recession later this year or early next. UNH has been a terrific stock to own in any market, as its three-, five- and ten-year returns attest. But it is also the epitome of a stock to own during an economic downturn. It pulled back since being added to the portfolio, but the lagging in defensive stocks is likely to correct itself in the months ahead.” BUY

Visa Inc. (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was down a tad in the last week but remains above 221 support. There was no real news. Keep holding. HOLD

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, has coughed up all of its May earnings gains and has fallen to six-week lows. In his latest update, Mike wrote, “Wingstop (WING) has dipped right to its 50-day line, continuing its slow descent since earnings a month ago. Having taken partial profits, we’re OK giving WING a bit of rope (if it wants to nose below the 50-day line, etc.), but in general, if all’s well here, we’d expect the stock to find buyers soon. Hold for now, but we’re watching it.”

With a 12% gain on the stock in three months, we’re not abandoning ship on WING yet either. But I do think a downgrade to Hold makes sense until the stock can put in a new bottom. MOVE FROM BUY TO HOLD

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has spiked higher in June, bumping up against the very top of its traditional 37-39 range. In fact, it’s currently matching 52-week highs from last June and this January. A break above the mid-39s – and to new 52-week highs – would be very bullish. 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, gained a little ground this week, jumping to 26 from 25, and it seems to have bottomed in the high 24s in late May. There was no news, and we still have a sizable gain in this purveyor of boutique fitness studios and brands. We’ll keep it at Hold and won’t even consider selling unless it breaks down again and dips below short-term support. HOLD

The next Cabot Stock of the Week issue will be published on June 20, 2023.