Cabot Stock of the Week Issue: June 5, 2023

Before I get into it today, one note: I have a new podcast! It’s called Cabot Street Check, which I co-host with my colleague Brad Simmerman, our Web Editor and Chief Analyst of our Cabot Wealth Daily newsletter. Every Friday we discuss what’s happening in the market, do deep-dives on various investing-related topics, and bring on a guest that is typically one of our many in-house Cabot analysts, several of whom originally recommended the stocks that comprise the Stock of the Week portfolio. You can listen to all our episodes here, or by subscribing to Cabot Street Check on YouTube, Apple, Spotify, or wherever you get your podcasts.

OK, now that I’ve gotten that shameless (albeit rare) bit of self-promotion out of the way, on to the market. Simply put, stocks are the highest they’ve been all year and are fast approaching their 52-week apex from last August. The debt ceiling is now behind us with basically no damage done, unlike 2011. The Fed has made public comments about “skipping” another rate hike this month. And with yet another better-than-expected jobs report in the books, a recession is seeming less likely (or at least less damaging) by the day.

With all that in mind … is this it? Is this the beginning of the substantial - and sustained - rally we’ve been waiting for? For the first time in more than a year, there’s no real market boogeyman looming over every mini-rally, resulting in myriad false starts and bear market rallies. That could change, of course, if inflation comes in hotter than expected next week, and the Fed suddenly decides to raise rates again. And consumer confidence remains mixed, at best, which has put a dent in retail sales of late. But it feels like the worst of the seemingly endless chain of existential economic crises is behind us. And judging by all the buying in the last two weeks, it appears institutional investors share that optimism.

Nowhere has that optimism been more evident than in artificial intelligence. AI is the new “it” sector on Wall Street, and any company even tangentially involved in it has gotten a boost of late. We already own one of them (MSFT), and it’s at 52-week highs. Today, we add another one to broaden our exposure to this red-hot sector. It’s a new pick from Mike Cintolo in his Cabot Top Ten Trader advisory.

Here are Mike’s latest thoughts on it.

ServiceNow (NOW)

Artificial intelligence has been around for a while, but the market began to pounce on some ideas at the start of this year—mostly with the purveyors of AI, though many soon fell flat during the market’s banking-induced correction in February and March. Recently, though, the AI move has come back even more powerfully, and this time, it’s mostly about the infrastructure players: Semiconductors and some networking types have soared, and there are a few software names that look to be in the lead when integrating AI capabilities into their platforms, which should be in huge demand by clients in the months ahead.

That leads us to ServiceNow (NOW), which seems to offer the best of both worlds in the current environment. The company itself has grown from upstart to emerging blue chip to actual blue chip in recent years ($112 billion market cap), with a best-in-class offering that helps firms of all sizes boost their digital capabilities. ServiceNow started with IT operations, automating many manual tasks and dramatically boosting efficiencies. And since then, it’s expanded into broader workflow offerings for technology development, employee management (with a lean toward managing hybrid and mobile workforces), customer experiences and boosting app and content creation even with non-programmers (so-called low-code development).

And economic slowdown or not, ServiceNow has ridden its fantastic product development to rapid, reliable growth for many years—earnings per share rose more than 10-fold from 2016 (70 cents per share) to 2022 ($7.59) and analysts see about $9.50 per share this year and nearly $12 in 2024. (It should be noted that free cash flow is even larger than these numbers with nearly $11 per share last year and likely $13 per share in 2023.) Thus, just with the core business, ServiceNow’s reputation and growth prospects should keep big investors interested, especially with the overall market environment improving.

But the story also has an AI kicker, too, with ServiceNow’s top brass moving aggressively into the field. 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. But wherever it comes from, growth should be solid—at its analyst day last month, ServiceNow thinks subscription revenue can grow from $8.5 billion this year to north of $15 billion in 2026, with continued increases in operating and cash flow margins, too. Said another way, the pattern of 20% to 25% top-line growth and 25% to 30% earnings and cash flow growth should continue for many years to come.

Of course, none of this prevented NOW from getting hit during the bear market—despite solid results, shares fell a bit more than 50% from peak (late 2021) to trough (last October). But after a double bottom in early January, shares spiked back to nearly 500 and then spent a bit over three months consolidating normally while the market worked its way through more Fed rate hikes and the regional bank crisis.

But like many leaders, NOW held the 40-week line in late April (after a shakeout on earnings) and when the pressure began to come off the market, it started to rally—and then it gained steam with the AI boom, breaking out above 500 a couple of weeks ago and following through nicely since. With the stock at 2023 highs but well shy of its late-2021 peak near 700, there’s plenty of upside. Buy on dips.

Current Recommendations

Changes Since Last Week: None

No changes this week, as most our stocks are acting quite well thanks in part to the recent pickup in the market. Indeed, no fewer than five of our stocks are hitting either 52-week or 2023 highs as of this writing! With the addition of ServiceNow (NOW), that leaves us with 19 stocks, one shy of our cap. So eventually, we may have to make a hard decision. But for now, most of our stocks are rated buy as we take advantage of a market that’s finally broken out of its months-long range and appears poised for even bigger gains.

Here’s the latest with all our stocks.

Updates

Brookfield Infrastructure Corporation (BIPC), originally recommended by Tom Hutchinson in Cabot Income Advisor, mostly held firm this week. In his latest update, Tom wrote, “The infrastructure company (was) up over 10% (in May) while the market is slightly negative 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. BIPC did pull back a couple of days last week when the overall market sold off. But the stock has since regained its footing and moved back higher. It is around the top of the recent range and the market will likely dictate near-term performance.” BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has been on a roller-coaster the last two weeks, plummeting from 64 to 59 but now back up at 63 as the market has improved. The growth story is still very much intact for China’s largest electric vehicle maker, and coming off a quarter in which it grew earnings by 410%, the stock’s forward P/E of 28 looks like a massive bargain. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, keep holding steady at 39. In his latest update, Bruce wrote, “With $120 billion in revenues, Comcast is one of the world’s largest media and entertainment companies. Its properties include Comcast cable television, NBCUniversal (movie studios, theme parks, NBC, Telemundo and Peacock), and Sky media. The Roberts family holds a near-controlling stake in Comcast. Comcast shares have tumbled due to worries about cyclical and secular declines in advertising revenues and a secular decline in cable subscriptions as consumers shift toward streaming services, as well as rising programming costs and incremental competitive pressure as phone companies upgrade their fiber networks.

“However, Comcast is a well-run, solidly profitable and stable company that will likely continue to successfully fend off intense competition while increasing its revenues and profits, as it has for decades. The company generates immense free cash flow, which is more than enough to support its reasonable debt level, generous dividend and sizeable share buybacks.

“There was no significant company-specific news in the past week.

“Comcast shares … have 17% upside to our new 46 price target.” BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is at new all-time highs! In fact, it is now the largest pharmaceutical company in the world by market cap, leapfrogging Johnson & Johnson (JNJ). Two revolutionary drugs are fueling LLY’s surge: Mounjaro, its diabetes drug, succeeded in curbing obesity in its second final-stage trial; and donanemab, a drug that treats Alzheimer’s, is just the second drug to ever prove it can modify the disease through its clinical trials. Now at new heights above 445 a share, the stock is up 22% year to date, and we have a 35% gain in two and a half months. If you got in early, it would make sense to shed a few shares now, selling perhaps a quarter of your position, with the stock at all-time highs. Otherwise, buy on dips. BUY

Green Thumb Industries (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, was off a tad this week after gaining 6% the previous week. Still, the stock is up about 10% from its late-April lows despite some big ups and downs. As Michael noted in his latest update, “In late May, Green Thumb opened a RISE dispensary in Bristol, VA. That takes the state store count up to five, and the nationwide count to 80.” It’s the largest U.S. cannabis company, and still growing. The stock still looks like an incredible bargain – and is finally showing signs of life. BUY

Kimberly-Clark de México (KCDMY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is up about 2% since we last wrote, and is bumping up against three-week resistance. There was no news. I still like this as a play on Mexico’s 25% manufacturing discount to U.S. and China, and the trend (+23% year to date) remains up. BUY

Las Vegas Sands (LVS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, rebounded very nicely this week after bouncing off support at 55. Shares of this gaming giant that derives much of its revenue from its Macau properties are now up 20% year to date thanks in large part to China’s post-Covid reopening. There’s plenty of momentum here, even after a down May. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, is at new 52-week highs. Again. At 335 as of this writing, shares are fast approaching their late-2021 all-time peak above 343. Artificial intelligence continues to be the driving force, as Microsoft (with ChatGPT and Bing) is at the forefront of the AI craze. We are up 31% on our position in three months. You could sell a few shares here, but the stock has gone nowhere but up all year, and now the market appears to be getting in gear. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has dipped to two-month lows. We still have a nice gain on it, however, and shares are nowhere near in danger of dipping below their 200-day moving average. So, we’ll keep it at Buy. In his latest update, Carl wrote, “The Danish drugmaker announced Phase 3 trial results for an oral version of Wegovy to match Pfizer. Shares are up 36% during the last six months and the company expects $40 billion of revenue in 2024 across its drugs for diabetes, obesity, rare diseases, and cardiovascular disease but new competitors are emerging.” BUY

Si-Bone (SIBN), originally recommended by Tyler Laundon in Cabot Early Opportunities, had a very good first week in the portfolio, rising more than 6%. There was no news, so the move was likely in sympathy with the strong week for the market. 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, was up about 5% last week and is trading at new 52-week highs! About half those gains have come today after the streaming audio giant said it plans to cut about 200 jobs, or 2% of its workforce, as part of a reorganization of its podcast division to focus only on its top performers. Job cuts aren’t the sexiest reason to buy a stock, but for now, investors are taking the bait as Spotify becomes more cost-efficient. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, rewarded our faith in it after we bumped our longest-standing stock back up to Buy last week. Shares shot up another 10% to hit new 2023 highs above 220 on the heels of a successful (at least from a PR perspective) visit to China by Elon Musk. But the bigger news came this morning: In May, the company delivered 77,695 Chinese-made electric vehicles, a 2.4% improvement from April and a 142% increase from last May – a reflection of China’s lifting of its draconian zero-Covid policies. Caveats aside, that’s impressive growth in the world’s largest economy, and it has kept the rally going in TSLA stock. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, is hitting new 52-week highs above 40! In his latest update, written before the break to new highs in the last two trading days, Mike wrote, “We added a half-sized position in UBER last week, and like most of the market, it’s eased lower since, dipping on low volume to its 25-day line. As we wrote when we added it, we’re optimistic the third time is the charm for the stock in terms of investor perception, as quarter after quarter the firm is delivering (and exceeding) EBITDA and booking expectations, with a possible hike to the firm’s $5 billion EBITDA target for next year coming soon. As with most everything, economic fears are ever-present—it seems like until the Fed calls off the dogs there will be some worries the bottom will fall out. Still, there’s always something to worry about, and UBER’s long bottoming action (dating back to last August) and decisive upside before and after earnings give it good odds of heading higher over time. If you don’t own any, we’re OK starting a position here.” BUY

UnitedHealth Group (UNH), originally recommended by Tom Hutchinson in Cabot Dividend Investor, shook off its May cobwebs and has risen back above 500. The company’s Optum division is attempting to buy Amedisys (AMED), a leading provider of home health, hospice and high-acuity care, in an all-cash deal for 100 a share, a 29% premium to Amedisys’ 77 share price at the start of Monday trading (it’s now up in the 90s). News of that proposed deal didn’t move the needle on UNH shares much this morning, but it’s possible it was responsible for last week’s run-up as institutional investors caught wind of it. Regardless, UNH is now trending in the right direction, with shares back above their 50-day moving average. BUY

Visa Inc. (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor, has bounced nicely in recent days to reclaim some of its late-May losses. In his latest update, Tom wrote, “V has been hanging in there despite a nowhere market. The payments processing company grew earnings per share by 17% and revenues grew double digits versus last year’s quarter. That’s terrific when the average stock is posting lower earnings. Plus, it can really take off when the market recovers for good. This is a great stock in an up market. The resilience in this market is encouraging and makes the stock easy to hold.” HOLD

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, keeps holding steady after a big earnings gap in early May. In his latest update, Mike wrote, “WING continues to slowly drift lower, nosing below the 200 area this week as the 50-day line (near 194) has caught up. Thus, the correction has been normal so far (importantly, it’s held above the prior all-time highs in the 190 area), though we’re getting close to the fence—having already sold some, we’re willing to give shares a bit more rope, a decisive drop from here could be abnormal. We’ll see how it goes—deep down, we think the cookie-cutter story here has a very long way to play out, and while same-store sales are likely to slow some, they’re coming off huge levels (20%-plus) so any double-digit gains should keep Wall Street happy.” BUY

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is a rock. It keeps holding in the 37 to 39 range, unaffected by all the volatility and turbulence virtually everywhere else in the market. 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, trickled lower but is still holding above its late-May lows. Shares of this small-cap purveyor of boutique fitness studios and brands have reached a crossroads, but we had such a nice cushion on XPOF (at one point we were up more than 80% on it) that the poor performance in May (along with many retail stocks) only erased about half our gains. We’ll hang in there. Only a break below support at 24 would have us rethinking that stance. HOLD

The next Cabot Stock of the Week issue will be published on June 12, 2023.