Cabot Stock of the Week Issue: June 24, 2024

Stocks appear to be hitting the pause button after a strong May and first half of June. Pauses are not uncommon in the summer months, especially in election years. And the artificial intelligence narrative may be running out of steam, or at least it’s on vacation.

Still, the market is an accounting error away from all-time highs, and many stocks – including quite a few in our portfolio – are acting quite well. But with summer malaise possibly on the brink of choking off rallies in most sectors, today we add a value stock that potentially has an immediate, near-term catalyst.

It’s a recent recommendation from Matt Warder. Who is Matt Warder? He’s the newest addition to the Cabot analyst team, a cyclicals and commodities analyst who has taken the reins of our Cabot Turnaround Letter. Heretofore, the Turnaround Letter – which aims to spot turnaround stocks, as you might have guessed – has not been part of the Stock of the Week rotation. But Matt has graciously allowed me to pluck the occasional turnaround pick from his portfolio, and this month we do so in the form of a very well-known company that Matt likes right now for a very specific reason.

I’ll let him tell you about it.

United States Steel Corporation (X)

U.S. Steel is undergoing a facelift. And “green steel” is the reason.

Green steel aims to further transition away from carbon-intensive forms of steel production – such as the traditional “blast furnace” – and move more toward zero-carbon manufacturing methodologies such as electric arc furnaces (EAF), which recycle scrap steel into new material.

In recent years, valuations for modern, “greener” steel companies have significantly outweighed those of their traditional counterparts, though that has evolved a bit since COVID as steel prices soared and companies bought back shares.

But because of that dynamic, U.S. Steel made an enormous bet on transitioning its own operations, acquiring 50% of the EAF mega-project Big River Steel in 2019 for $700M, then buying the remaining 50% for $774M less than two years later. When completed in 2024, the second EAF facility will bring total production capacity to over 6 million tons per year and afford U.S. Steel the flexibility to slow down or shut blast furnace capacity elsewhere.

Eyeing that growth and potential, the country’s largest flat-rolled steel producer and supplier of iron ore Cleveland-Cliffs (CLF) – led by magnanimous Brazilian Lourenco Goncalves – made an offer to purchase U.S. Steel for $35 per share (a 54% premium at the time) in a 50/50 split of cash and CLF shares in early August of last year. That set off a bidding war that saw incrementally better offers from Esmark ($35/share all in cash), CLF again ($38.64 in shares and cash), ArcelorMittal and Stelco (in the $40-42 range), and CLF yet again ($47.31 in shares and cash) before finally settling on an all-cash offer from Nippon Steel at $55.

Not one to be outdone, Cliffs’ colorful leader Goncalves has actively tried to scuttle the deal, currying favor from politicians and the steelworkers’ union, and putting out press releases with titles like “You Have No Path to Close”. And for what it’s worth, both Presidential candidates and the broader market have agreed, with share prices falling from ~50 all the way back to 35 in late May.

The outrage is, in a word, dumb. Japan is an ally to the United States and therefore poses no genuine national security risk. The operational concerns voiced by the union are equally without merit. In fact, Nippon would be more likely to increase domestic steel production to optimize global shipping logistics and thereby reduce Scope 3 carbon emissions. In turn, that would keep the U.S. Steel blast furnaces and coke ovens open longer than planned under current company leadership and ensure those union jobs remain.

Moreover, the alternative – a CLF acquisition – would never pass antitrust scrutiny as it would give a single company control of 100% of blast furnace production in the United States.

Therefore, I suspect there are two likely outcomes. Either the deal goes through and shareholders, who have already overwhelmingly approved the merger, get paid a 50% premium to the current 37 share price, or nothing happens, and U.S. Steel continues its path toward a greener future that comes with both production growth and a much higher multiple.

So, with that in mind, the time has come to be contrarians and take the other side of the bet.

The company’s share price has corrected back close to CLF’s initial offer price of 35 per share. This level has some support, given it approximately matches the prior cycle high at the outset of the Russia-Ukraine War. Moreover, from a technical standpoint, it has nearly hit its bottom Bollinger Band, and its Relative Strength Index is in hugely oversold territory at 40, approaching prior cycle lows around 34. As such, it looks like an excellent contrarian value at current prices.

Prices for the underlying commodity (hot-rolled coil) are incredibly cyclical, with seasonal price movements hitting a peak in March or April and a trough around October.

If the deal is approved, I recommend exiting the holding upon completion of the deal. Alternatively, you could exit when we get twin tailwinds from both the commodity cycle and the company’s expansion, which should be priced in within 12 months.

We recommend the purchase of United States Steel Corporation (X) shares with a 55 price target.

Current Recommendations

Changes Since Last Week:
None

No changes to the portfolio this week, which means we are immediately back above our desired 25-stock limit with today’s addition of U.S. Steel (X). However, two or three of our stocks are on a short leash due to some recent weakness, so I imagine the “problem” of a still slightly bloated portfolio will work itself out in the coming weeks. For the moment, it’s a good problem to have, not seeing any stocks worthy of cutting bait on just yet.

There’s a lot of good happening in our portfolio. Here’s what’s happening with all our stocks.

Updates

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is bumping up against 2024 lows just below 20 a share, though it did bounce last Friday. If the stock holds above yearlong support around 19.8, we’ll hang in there. But the retail narrative has collapsed, as U.S. sales rose a measly 0.1% in May and were revised downward to a small decline in April. And while American Eagle is still on track for a solid fiscal year (2.9% sales growth, 17% earnings growth), right now it’s not enough to combat the narrative of slowing U.S. retail sales. With a still-decent gain in AEO, we’ll keep this stock at Hold until it dips below 19.8 support. But if it does, expect a quick hook. HOLD

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, was flat again this week on no news. AVVIY has remained in the low to mid-12s since flirting with new highs above 12.7 last month. 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 and a price-to-book of 1.42. Shares have 13% upside to our 14 price target. The 6.9% dividend yield adds to our strong total return thus far. BUY

BellRing Brands, Inc. (BRBR), originally recommended by Tyler Laundon in Cabot Early Opportunities, had a very good first week in the portfolio, advancing 4.5% to regain essentially all its losses from the previous week. 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).

Last August management approved a plan to discontinue distribution of the PowerBar bar brand (3% of 2023 revenue), which has floundered for years.

Here’s what Tyler wrote about BellRing last week: “The company’s products fit into the convenient nutrition category, so the stock is really a play on people trying to lead active, healthier lives and eating foods and shakes that help them replace typical meals and/or recover from exercise. It’s also a beneficiary of the new class of GLP-1 weight-loss drugs.

“BellRing is concentrated within mega-retailers. Three-quarters of revenue comes from Costco (COST), Walmart (WMT) and Amazon (AMZN) while the remaining 25% comes from online, specialty, and convenience stores.

“Growth has been fantastic for this type of company. Revenue in 2023 grew by 21% while EPS grew almost 14%.

“In Q2 fiscal 2024 (reported in May), management delivered a beat-and-raise quarter as revenue grew by more than 28% (to $495 million) and EPS grew 88% (to $0.45).

“Full-year guidance was increased, mostly because sales of Premier shakes and powders are going so well (some stores even sold out in April).

“The company is boosting production to better fill demand and marketing investments, combined with an anticipated price increase toward the end of the year, should keep revenue, EPS and margins all trending in the right direction. For 2024, we’ll look for revenue to grow by at least 18% to $1.97 billion. EPS should be up 34% to $1.77, or better.

“As a final sweetener, there’s been some chatter about BellRing being a potential acquisition target. I can get on board with that, especially given that the PowerBar divestment makes it a cleaner operation.”

The stock peaked in the low 60s several times earlier this year; it currently trades at 57. Any break to a closing low of 62 would be bullish. But, so far, so good. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, keeps bouncing back along with the market, rising from 117 to 125 in the last two weeks. 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, albeit a lopsided one of late, with very few stocks outside of the mega-cap tech behemoths participating in the rally, and so BX has been a bit mixed, down from its April highs at 132. The bull market is far from over, however, which means BX shares still have some utility in our portfolio. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was down about 10% after advancing 27% the week before; I hope you took my advice to sell up to a third of your position when it was hitting new highs near 1,850 a share last week! Why the extreme volatility of late? Earnings. Here’s what Tom had to say about it last week: “Holy AI, Batman. Earnings were worth the wait. Last week Broadcom reported earnings that blew away revenue expectations with a 43% increase over last year. Revenue was driven by increased AI demand with AI products selling $3.1 billion for the quarter. The stock has rallied over (27%) since last Wednesday’s report. The company also announced a 10-for-1 stock split that will take place on July 15. That’s always a big hit with investors. If trading at the current 1,800 per share, your shares will be worth 180, but you will own 10 times as many shares.” AVGO shares have pulled all the way back to 1,650 since Tom wrote that last Wednesday. It’s tempting to upgrade the stock right back to buy after being beaten back so thoroughly in the last week, but let’s stay disciplined and keep this a Hold for those who already own it, given the extreme volatility. It’s not worth trying to hop on such a bucking bronco, but eventually, the stock will settle down and possibly become buyable again. HOLD

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, has coughed up most of its gains from the previous week, pulling back from new highs above 94 to 90. In his latest update, Mike wrote, “Cava (CAVA) looks fine overall but remains wild, and today it fell victim to what we’re seeing more and more out there—selling on strength as a name approaches resistance, in this case the prior high. Obviously, if the market keels over all bets are off, but at this point even today’s tedious fall didn’t do much damage, with the 25-day line down near 87 and volume about average. Translation: We’re not complacent and we’ll see if and how this dip progresses, but the path of least resistance remains up.” BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, has impressively held most of its gains after gapping up from 340 to 390 earlier this month. Shares are hovering above 380 as of this writing. In his latest update, Mike wrote, “We decided to stay on Hold with CrowdStrike (CRWD) last week since the catalyst for the latest move to new highs was its addition to the S&P 500. Of course, we’ll certainly take it and are holding on, but we’d like to see how the stock acts after its addition to the index at the start of next week (typically there’s some selling). Bigger picture, though, we’re optimistic, as the latest quarterly report basically flew in the face of many recent reports from big tech firms, with demand for CrowdStrike’s platform solid and steady as sales, recurring revenue, earnings and free cash flow all continue to ramp. If you really want to nibble here, we wouldn’t argue with you, but officially we’ll stay on Hold and see where things stand next week.” Mike wrote that last Thursday, so by “next week” he means this week. Potentially a pivotal week for where the stock goes next. With a massive gain already, we’ll keep our rating at Hold for now at these levels. HOLD

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, keeps holding its May and June gains around 890. In his latest update, Tom wrote, “It’s another new day and another new high. This superstar pharmaceutical company stock is up 22% since the beginning of May and 53% YTD. The catalyst this time 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 have nearly a 170% gain on this stock in just over 15 months. If you have not yet taken some profits, I recommend doing so now, with the stock still hovering near all-time highs. Officially, however, our rating is still a Buy. BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, was flat this week after pulling back from new highs above 142 to 138 last week. Still, shares have nearly doubled since late October. 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, appears to have bottomed, at least in the short term, as the stock has bounced from just below 11 a share to just above 12 this month. There’s been no major news as the entire cannabis sector is on hold during the 60-day “comment” period after the Department of Justice recommended marijuana be rescheduled from a Class I (most dangerous) to a Class III (not very dangerous) drug last month. Final rescheduling approval could give the entire sector a nice bump, as it could help pave the way for further legalization of marijuana. So, for now, we await that and other potential cannabis catalysts (like the SAFER Banking Act, which would grant banking access to cannabis companies). This stock could get a nice pop when one arrives. HOLD

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, held its gains after touching new all-time highs above 430. There was no news this week. 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 28% this year. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, keeps holding at 49, where it’s been most of June. Even with a stagnant share price, this business development company pays due to its monthly dividends and high (8.4%) yield. It’s a steadying, income-generating presence in our portfolio. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, has been on a tear of late, rising from 415 to record highs above 450 this month on the resurgence in artificial intelligence fever on Wall Street. The arms race with hard-charging Nvidia and Apple over which stock will be the most valuable public company in the world by market cap (it’s still Microsoft) appears to be lifting all boats, with a common thread: AI is driving all three. Microsoft’s artificial intelligence leadership position has made believers out of Wall Street, including Oppenheimer analyst Timothy Horan, who 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

Neo Performance Materials (NOPMF), originally recommended by Carl Delfeld in his Cabot Explorer advisory, keeps flirting with the 6 per share level, getting a boost after Stifel upgraded it to “Buy” with a price target of 13. This rare earth stock is already up more than 10% since we added it to the portfolio two weeks ago. As Carl notes, “Neo remains a buy due to its strategic importance; it also trades at a 50% discount to book value, pays a nice dividend, and maintains a strong cash position coupled with low debt. Some rare earth prices are in an uptrend though trading at price levels far from their recent highs.” BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, mostly held its gains after busting to new highs above 670 last week. There was no major news, but the company is still riding momentum from a 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, bounced back after briefly dipping below 140 and is again knocked on the door of its early-June highs above 143. As Carl noted in his latest issue, the company is facing “political pressure on the high pricing of its products in the United States. A Wegovy prescription costs about $1,349 per month in the U.S., while it costs just $140 in Germany and $92 in the U.K. Novo Nordisk’s Ozempic product carries similar markups. Novo’s CEO is expected to testify before a key Congressional committee soon. Novo is in a strong position in this huge and growing market.” The stock has more than doubled since we added it to the Stock of the Week portfolio at the end of 2022 and, given the extreme popularity of its weight-loss drugs, there’s plenty more upside ahead. BUY

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, was down from 42 to 40 this week and has lost momentum since hitting new highs near 44. In his latest update, Mike wrote, “On Holding (ONON) has come under some pressure of late on no obvious news, likely just a symptom of the divergent market. Even so, the stock is ‘only’ down to its 25-day line and the one day that saw elevated volume saw the stock find support after a (weird) morning selloff. There’s been nothing new on the company, but the potential remains huge as On is just a fraction of the size of players like Nike, Adidas or even Lululemon and still has huge opportunities as it moves into other sports and boosts its non-shoe businesses (apparel, accessories).” BUY

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, was down from 114 to 113 but has been tossed around a ton as the interest rate narrative changes by the day. In his latest update, Mike wrote, “For the first time in months, we’ve seen some interest rate-sensitive sectors like homebuilders (as well as small caps, regional banks, etc.) fail to rally after a dip in rates—a bit of a recession (or economic slowdown) trade. PulteGroup (PHM) is on the edge for us, as it’s revisiting multi-week lows after a modest bounce earlier this month. The April low near 105 is a hard line in the sand for us, but frankly, if the stock can’t hold up around here, we’re likely to book the rest of our profit and look elsewhere. Hold for now, but PHM is on a very tight leash.” So far, it’s holding up fine, despite dipping as low as 110 late last week. I think this one’s worth holding onto given the upside in a post-rate-cuts world, which could commence as early as the end of next month, though more likely in September (or later). With a solid 25% gain on this stock in just six months, we can afford to be patient. I rate PHM a Buy, especially since it’s down more than 7% from its May highs. BUY

Qualcomm, Inc. (QCOM), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is down about 5% in the last week since touching new all-time highs above 215. It’s a normal pullback for a stock that had been on a tear – it’s up more than 40% year to date. Tom explained the strength in his latest update: “Being perfectly positioned ahead of the next phase of artificial intelligence, in mobile devices, is very compelling to investors. A very bright future is driving the stock price higher. It 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. AI is hot stuff and Qualcomm appears to be poised in front of the next wave.” BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, added another point, rising to new 52-week highs around 76 as its yearlong advance continues. There was no news. With its three-headed business monster – Shopee (e-commerce), SeaMoney (fintech), and Garena (online gaming) – Sea Limited casts a wide net as a play on Southeast Asian growth. Shares of the Singapore-based company are up 87% year to date but still trade at just a fraction of their 2021 highs above 350. This was once a 10-bagger for Carl in Cabot Explorer, and it could have similar upside this time around now that Garena is in the midst of a turnaround after a Covid-era lull. BUY

Super Micro Computer (SMCI), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is down 9% in the last week after advancing 10.5% the prior week, so this one is quite volatile at the moment. The company itself did no wrong, but its fate is mostly tethered to Nvidia, which is down 11% since reaching new highs early last week. But the news for Supermicro has mostly been good, as the company “announced it was adding three new manufacturing facilities to meet increased production demands and support the growth of demand from its clients,” Carl wrote in his latest issue. “Supermicro benefits not only when Nvidia releases new advanced chips but when other leading chipmakers do so as well. This aggressive stock is at the heart of the AI boom.” With the stock trading well above its June and April lows, this dip looks buyable. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, held firm in the mid-180s, which is an improvement from recent weeks when it kept returning to the mid-170s. Since the company’s board approved Elon Musk’s record-setting $56 billion pay package (it still has legal hurdles to cross for full approval), things have been quiet. The next real catalyst may not come until next month’s pivotal earnings report; the EV maker needs to reverse the trend from the last three quarters, in which revenue lagged (and even shrank last quarter) and margins narrowed. It seems the worst for the stock may be behind it, as the late-April bottom at 142 is now two months in the rearview mirror. But we will keep TSLA at Hold until it can find a real catalyst that pushes shares back above 200. HOLD

Uber Technologies (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, held firm at 70 after a nice push from lows around 63. In his latest update, Mike wrote, “Uber (UBER) has exhaled a bit on very light volume after its off-the-bottom bounce, still holding north of its 50-day line. With a small position, we still have a stop near the recent lows (call it 62-64 or so), but what we’re really looking for is a resumption of the recent push higher, which would signal a fresh base-building effort is underway. As has been the case all along, Uber’s free cash flow story continues to look great, so if the stock can round out, we’d be intrigued. Still, it has proving to do—we’ll stay on Hold and watch the action carefully.” So will we. HOLD

United Airlines (UAL), originally recommended by yours truly in the Growth/Income Portfolio of Cabot Value Investor, has mostly stabilized since dipping from 53 to 49. Shares remain dirt-cheap trading at less than 5x earnings, and with summer travel season upon us and 7.3% revenue growth forecast this year, I think there’s plenty of upside, especially trading at roughly half its pre-Covid levels. BUY

UnitedHealth Group Inc (UNH), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was down slightly but has not broken the seal on two-month support in the low 480s. The mega-cap healthcare company with a modest dividend yield is a safe, if not exciting, play on the aging of the population – a trend not impacted by inflation, interest rates, or global conflicts. It may be a slow burn, but over time, we think UNH will be a steadying – and profitable – force in our portfolio. 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. This week, our aforementioned news Cabot analyst, Matt Warder, joined us for an insightful look at why cyclical stocks (and certain commodities) may be poised for a big run.

The next Cabot Stock of the Week issue will be published on July 1, 2024.

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