Cabot Stock of the Week Issue: March 11, 2024

Stocks finally had a bad week, and it wasn’t even that bad. All the major indexes were off mildly. This week brings more potential turbulence, however, in the form of a very familiar recent foil: inflation. The February CPI data gets released tomorrow morning. On the heels of an encouraging PCE report, there’s probably nothing to fear. But with stocks having risen for more than four straight months, it’s possible market bears will be looking for any reason to sell. It’s worth keeping an eye on, though I wouldn’t get too worked up about macro issues these days.

In the meantime, our portfolio keeps humming. But it makes sense to balance out all our growth-y plays with some value, just in case the market does pull back in the near term. So today, we add the latest recommendation from Cabot Value Investor Chief Analyst Bruce Kaser. It’s a classic industrial play that has nothing to do with artificial intelligence, weight-loss drugs or any other flavor-of-the-month trends. It’s just a solid company that’s in recovery mode.

Here are Bruce’s latest thoughts on it.

Worthington Enterprises, Inc. (WOR)

Late last year, highly regarded Worthington Industries split into two companies. While both new companies have appeal, we like Worthington Enterprises (WOR), an industrial company focused on producing specialized building products (42% of sales) and consumer end-market products (48%), backed by valuable brands including Clark-Dietrich and Benzomatic. The value of the Enterprises businesses were previously obscured by the market’s perception that the original Worthington Industries was primarily a low-multiple steel processor. While the market sees an average company with a mix of only partly related metal products, we see a high-quality company with strong positions in valuable and profitable niches, backed by capable management and a solid balance sheet.

One indicator of the value of its niches is the healthy 21% EBITDA margin. Another is that most of its businesses have high barriers to entry. Its cylinders operation, for example, which produces aluminum and steel tanks that store and dispense propane, fuel gas, refrigerants and other gases, must meet demanding safety standards and is subject to only limited competition from cheaper imports.

Helping boost its revenues and margins is the company’s emphasis on services. Not just a producer and seller of products, Worthington is often called upon to develop unique variations of its raw materials and final configurations to meet specific customer needs, particularly in its Building Products segment where no two construction projects are exactly the same. Customers will pay a little extra to get the necessary quality and durability.

Worthington Enterprises also operates a small but profitable and growing global hydrogen products business. Its niche, producing on-board fueling systems and gas containment solutions, is a critical part of the hydrogen ecosystem but has limited competition.

As a company, Worthington retains the high-quality culture created in 1955 when John McConnell founded the original Worthington Industries. CEO Andy Rose was CEO of Worthington Industries prior to the spin-off, providing valuable public company leadership experience. Rose is a 15-year veteran of the company, so he is fully immersed in the culture. He also brings some capital market savvy from his prior experience as a private equity investor. The CFO is a Worthington veteran and his prior role as CFO of the former parent company helps round out the leadership team. The company generates healthy profits and prodigious free cash flow (almost 10% of its post-spin market value), partly due to its asset-light business model.

While optically the shares do not appear inexpensive, at 12.2x EBITDA and 18.3x per share earnings, this company is under-earning its potential due to its too-low leverage (only 1.0x total debt/EBITDA which is almost fully offset by cash), immense free cash flow and temporarily elevated transition costs. We see Worthington Enterprises as putting its financial capacity to better use through a combination of small-ish acquisitions, an uptick to the dividend and the launch of share repurchases. The new company appears to have only started on its new path.

We are setting a 73 price target on WOR shares. BUY

Disclosure: Bruce Kaser personally owns shares of Worthington Enterprises (WOR).

Current Recommendations

Changes Since Last Week:
Elastic (ESTC) Moves from Hold to Sell
Pinterest (PINS) Moves from Buy to Hold

One sell this week, as Elastic (ESTC) has broken down after disappointing earnings a couple weeks ago. Still, we pocket a 36% profit in just four months – certainly nothing to sneeze at. The rest of the portfolio is mostly acting well, though Pinterest (PINS) is flirting with key support and thus warrants a downgrade. Our newest position, Sea Limited (SE), exploded more than 10% on earnings – rewarding us for the gamble of adding it last Monday just hours before the company reported results. Other holdings (Qualcomm, Novo Nordisk, to name a couple) stayed hot. Plenty to like here as the bull market stretches into its fifth month.

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

Updates

Alexandria Real Estate Equities, Inc. (ARE), originally recommended by Tom Hutchinson in the Safe Income Tier of his Cabot Dividend Investor advisory, was up another couple points this week and is at a three-month high. The life science property REIT may have gotten a boost from Jerome Powell’s admission that interest rate cuts are likely coming in the back half of the year, and could get another boost when Powell speaks again this week. Stay tuned. HOLD

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, fell hard even after a convincing earnings beat last Thursday. The clothing retailer reported fourth-quarter EPS of $0.61, well ahead of the $0.50 expected. Sales also beat estimates and improved 12% year over year. Full-year revenue, however, fell well short of analyst estimates, which is likely why the stock got knocked back from 24 to 22 in the last few trading days. No matter. The stock is still decidedly in an uptrend, and forecasts for fiscal 2025 (9.9% EPS growth, 3.3% sales growth) remain optimistic. So this dip on an earnings beat looks like a nice buying opportunity. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, has soared to new 52-week highs above 12! Strong full-year earnings were the catalyst: Operating profits at the U.K.-based life insurance and investment management firm improved 9% year over year, the company gave encouraging 2024 guidance, and raised its dividend by 8%. As a result, the stock pushed above resistance in the mid-11.6s to reach its highest point since 2022. We now have a 20% gain on the stock, and yet it still has 17% upside to Bruce’s 14 price target. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, fell along with the market, dipping from 127 to 125. That’s how this “Bull Market Stock” works – it ebbs and flows along with the market, which has mostly been a good thing the last four months. We still have close to a 20% gain on it. As long as the bull market remains intact, this is a good way to ride the momentum. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, finally ran out of steam after going nowhere but up in recent months, falling 8.5% after hitting new all-time highs above 1,400. Last Thursday’s earnings report was what sent shares tumbling: While revenues beat estimates, sales in its semiconductor division ($7.4 billion) fell short of fiscal first-quarter 2024 estimates ($7.7 billion). Dwindling demand for telecommunications is hurting its chips business, the company said. Broadcom’s AI-related business, however, is still going strong, which is why the company maintained guidance of $50 billion in revenue for fiscal 2024. While Broadcom doesn’t design the same kinds of chips Nvidia does – the ones that train large language models – its chips are essential to the immense data centers that power AI. CEO Hock Tan said he expects AI to account for 35% of its semiconductor revenue this year, up from previous estimates of 25%. So, things are still looking up for Broadcom, but it’s not the runaway freight train it had been acting like in previous months. Keeping at Buy, though let’s keep new buys small while the stock tries to find a short-term bottom. BUY

Cisco Systems, Inc. (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Value Investor, was up from 49 to 50 on no major news. Its $28 billion deal to buy Splunk is still awaiting regulatory approval, so the stock’s been a bit in limbo of late. The stock has recovered nicely from a disappointing earnings report several weeks ago, so let’s hang in there. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, has been chopping around quite a bit lately but was up slightly since we last wrote after a nice earnings report. In his latest update, Mike wrote, “CRWD’s Q4 report backed up the view that the firm’s rapid and reliable growth story is on track and should continue for years to come, despite a couple of big hiccups from cybersecurity peers of late. In the quarter, CrowdStrike’s annualized recurring revenue surged 34%, net new recurring revenue added to the tally lifted 27%, earnings crushed estimates (95 cents vs. 82 expected) and free cash flow grew 35% and came in at $1.14 per share. Nearly as encouraging were some details it revealed among its newer products like cloud, identity security and logscale SIEM, which combined had north of $850 million of recurring revenue by quarter’s end. That said, the stock showed similar action to what’s been going on among many leaders—after gapping up strongly, the stock gave up most of the move within a couple of hours, which continues CRWD’s wild trading of late; coming after a big move, it’s clear some big investors are taking profits.” With a 95% gain in six months, I recommend you do the same, booking profits on a few shares – a quarter to a third of your original position – if you have not already done so. Officially we’ll stay on buy, but only if you’re new to the position or have just a small stake. BUY

Dave & Buster’s (PLAY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continued to hold steady at 61, and has been holding its gains since a big run-up in January and February. There’s been no news. This remains a strong turnaround retail play (no pun intended) in a post-Covid world. BUY

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, has been up and down between 40 and 45 for the last month-plus. Here’s Mike with more: “DKNG continues to hack around since earnings three weeks ago (generally between 40 and 45), which, frankly, we don’t hate at all—while we cut our position in half during the stock’s early-January weakness (it had been lagging the nascent uptrend for a few weeks before cracking the 50-day line), we’re not opposed to adding some more shares if the stock sets up properly. Fundamentally, nothing has changed here, and while competition is always present, the longer DraftKings holds and gains market share (in both sports betting and iGaming—the latter of which one analyst thinks is underappreciated), the greater the chance big investors look past all of that, similar to what’s gone on with Uber in recent quarters (Lyft’s actions have less effect). As for DKNG, if you own some, hang on.” We’ll keep the stock at Buy, thinking another up leg could be forthcoming, especially as March Madness (perhaps the biggest American sports gambling event outside of the Super Bowl) gets underway later this month. But start small if you’re not already in. BUY

Elastic N.V. (ESTC), originally recommended by Tyler Laundon in Cabot Early Opportunities, has fallen apart since earnings, and it’s time to Sell while we still have a solid profit. In fact, Tyler recommended selling in a special alert to his readers last week. Here’s what he said: “Eventually, Elastic’s search platform will probably get a lot of AI business, but that time is not now—and unlike some others, institutions aren’t willing to pay up for the future right here, with shares sinking sharply after earnings, easily slicing intermediate-term support. Of course, the stock is still well above where it was a few months ago, so we’ll keep a distant eye on it to see if it can set up down the road. But such improvement is likely to take a while, if it happens at all.” ESTC has been very good to us since we added it four months ago. But now it’s time to part ways and pocket the quick profits. MOVE FROM HOLD TO SELL

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, fell hard this past week after touching new all-time highs, dipping roughly 8%. The FDA’s decision to delay its decision on donanemab, Lilly’s Alzheimer’s drug candidate, weighed on the stock, as it was expected to gain approval in the first quarter. Fortunately, Lilly’s recent tear has been predicated on Mounjaro, its weight-loss drug that, along with Novo Nordisk’s Ozempic and Wegovy, is still selling like hotcakes, resulting in huge fourth-quarter earnings and improved 2024 guidance. So this dip based on something unrelated to Mounjaro seems like a classic market overreaction, and I’d buy this dip, especially if you’ve missed out on the majority of LLY’s massive gains over the last year. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, has been in freefall since hitting 52-week highs above 14 a couple weeks ago. There’s been no news, but catalysts in the cannabis sector – namely rescheduling it to a Schedule III drug – have not yet arrived, though that could happen as early as next month. Staying in any cannabis stock requires patience, so that’s what we’ll do here. BUY

Intel Corporation (INTC), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, keeps holding in the 42 to 45 range. There’s been no major news since the company reported somewhat disappointing earnings last month. In his latest update, Tom wrote, “The red-hot chipmaker finally cooled off after earnings guidance disappointed and the stock fell from the recent high. But the selling has ended, and INTC has been moving higher over the past week along with the other semiconductor and AI stocks. The bounty from the new chips and the foundry business might not come as soon as optimistic investors had been hoping. The future is still bright though. There are great days ahead. Headline risk probably favors the upside for this stock in the months ahead with AI speculation still strong.” HOLD

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, has been between 402 and 415 for the last month and is back near the bottom of that range after a down week for the market. No major news. MSFT has been solid as a rock and should be in any long-term portfolio, as its new AI-related revenues have given the company new life. BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, gave back some of its gains from the previous week, though it remains within its March range. There’s been no news, though the streamer did come up mostly empty-handed at last night’s Oscars despite numerous nominees. Probably wouldn’t have moved the needle much in terms of the share price anyway. Buy the mini-dip. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, kept rising after a breakout last week, though it’s down slightly today. The Danish drugmaker – now the 12^th-most valuable in the world by market cap – got more good news for its weight-loss drugs last week after the FDA said Wegovy can cut the risk of heart attack and stroke. That comes on the heels of an Ozempic trial showing that its other weight-loss drug delayed the progression of chronic kidney disease in patients, reducing the risk of a cardiac event by 24%. This stock is now almost a double for us! BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is down slightly after hitting new highs above 65 last week. In his latest update, Mike wrote, “If you dive into Nutanix’s business and story, it’s easy to get an ice cream headache, but there’s no question the firm’s technology platform is appealing to tons of big clients due to its flexibility (multi-cloud deployments, modern app platforms, etc.) and much lower total cost of ownership than peers. Moreover, in the wake of Broadcom’s buyout of VMware, it appears many VMware clients are unhappy/nervous, which Nutanix’s top brass said is a significant, multi-year opportunity. Moreover, the firm’s GPT-in-a-box (company’s term) is small but seeing quick adoption, effectively allowing customers to quickly implement some generative AI offerings with security (don’t have to run them on the public cloud). The stock remains very much under control, with just one down week since October (!)—given the reaction to earnings last week, we restored our Buy rating for those that aren’t yet in, ideally on dips of a couple of points.” BUY

Palantir Technologies Inc. (PLTR), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up sharply, from 24 to 26, as the artificial intelligence story rages on. Investors didn’t take notice of Palantir’s AI bona fides until recently, but now it has Wall Street’s full attention, especially as Nvidia has gone into the stratosphere. As long as AI remains in favor, so will PLTR. BUY

PayPal (PYPL), originally recommended by Carl Delfeld in his Cabot Explorer advisory, held firm at 60 on no news. As Carl noted in his latest update, “A recent survey found PayPal the most popular digital payment app and it is increasingly available as a seamless checkout option at more and more websites. The stock trades at a forward price-to-earnings ratio of just over 11 even though the company generated $4.2 billion of free cash flow and bought back $5 billion of shares during the past 12 months.” BUY

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has had a rough few weeks and is threatening to dip below 2024 support at 34. Shares of the social media company are still well above their 200-day moving average but are now trading below the 50-day. Let’s downgrade to Hold. MOVE FROM BUY TO HOLD

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, pulled back to 110 after hitting all-time highs above 112 a week ago. In his latest update, Mike wrote, “After running straight up 35 points, PHM spent the next few weeks going straight sideways (between 100 and 110 or so), and now it seems to be getting going again—and, big picture, housing demand (and prices) remain strong, with the recent dip in mortgage rates helping the cause. Now, we would say that, as opposed to when we entered, PHM is lagging behind some peers by a bit, and the RP line for the stock (and those for the group as a whole) is doing the same. But we’re more focused on the bigger picture here, thinking the lack of giveback of late (despite the two-month rally in rates) and the still-strong economy will lead to more upside surprises for Pulte. We’ll go back to Buy.” We have stayed on Buy and will keep it right there. BUY

Qualcomm, Inc. (QCOM), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, has been on a tear, touching new 52-week highs above 175 before pulling back slightly. In his latest update, Tom wrote, “After a year where it underperformed the technology sector, QCOM is moving higher again. It’s up 60% since late October and 19% YTD. Semiconductors and AI stocks have gotten hot, and the strength may last a while longer. Qualcomm is secretly one of the best semiconductor and AI stocks to own. It had been held back by cyclicality, both in semiconductors and smartphones. But the negative cycle is coming to an end. Qualcomm is also introducing new AI chips for PCs and smartphones that could be big sellers this year. It’s an AI beneficiary that is just now coming into the spotlight.” BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, had a superb debut week in our portfolio, rising more than 10% to reach a new six-month high. The latest earnings report provided fuel, with the South Korean company showing a net profit for 2023 and all three of its businesses growing solidly. Those would be Garena, a leading global online games developer, Shopee, the largest e-commerce platform in Southeast Asia and Taiwan, and Sea Money, a leading digital payments and financial services provider in Southeast Asia. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, keeps chopping around between 740 and 780. This large-cap cloud software stock has been a strong performer since we added it to the portfolio last June, but it may be running out of steam. We may reassess its standing if it dips below 740, but for now, it’s in a reasonable buy range. BUY

Soleno Therapeutics (SLNO), originally recommended by Tyler Laundon in Cabot Early Opportunities, has been in retreat since topping out at 52 two weeks ago. It’s still holding above its moving averages, and the intermediate-term trajectory is still decidedly up. Soleno Therapeutics is a development-stage biotech company that burst onto the scene last September when its lead drug candidate, DCCR (Diazoxide Choline), was found to make a highly significant difference in a long-term study for the treatment of Prader-Willi syndrome (PWS). It plans to submit a new drug application in mid-2024. Plenty of upside remains. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, dipped to new 2024 lows at 175 before bouncing a bit today. A Deutsche Bank note predicting the electric vehicle king would miss first-quarter estimates by a wide margin surely didn’t help, though it wouldn’t be all that different from the last two quarters. Overall, TSLA just seems to be in a malaise. But betting against this company, and its stock, is folly. Chances are, it has something up its sleeve to help reinvigorate growth amid increased global competition. But right now, I’d hold off on new buys. If you own some, hang tight until the next rally arrives (and it always arrives). HOLD

Tripadvisor (TRIP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, keeps holding at 27, where it’s been for the past month since gapping up from 22 on big earnings. The post-Covid travel boom is alive and well, and we’re reaping the rewards, with a gain of 39% in just six weeks. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, retreated a bit this week, falling from 81 to 78. In his latest update, Mike wrote, “Uber (UBER) has also futzed around the past couple of weeks, though in its case you can’t throw many stones at it—the fact that UBER has yet to give up any of its gains from its Investor Day (not to mention the past few months) is a good thing overall. Fundamentally, the outlook revealed two weeks ago is obviously the big draw, but there’s a growing consensus that the firm’s runway of growth could last years into the future, partly due to expansion of its current businesses (in Rides, increasing penetration in some key markets would be huge—while in Delivery, rapidly moving into other non-restaurant areas, like grocery and retail, is a big opportunity), but also in new operations that take advantage of its size and scale: Advertising is the one talked about most these days (already a $1 billion business on a run-rate basis thanks to the eyeballs its app garners), and there’s also Uber Direct (white-label courier service that can deliver merchants’ goods directly; up in 18 markets now with huge growth taking place) with many other opportunities out there. Of course, none of that means UBER won’t correct at some point, but the growth story, numbers and chart continue to point toward it being a liquid leader. We’ll stay on Buy, preferably on modest weakness.” The last couple trading days qualify as modest weakness, so a Buy here wouldn’t be the worst idea. BUY

Varonis (VRNS), originally recommended by Tyler Laundon in Cabot Early Opportunities, had been holding around 49-50 for the past three weeks. The company reported solid earnings last month: Both annual recurring revenue (ARR) and free cash flow beat analyst estimates for the quarter, providing evidence that last year’s switch to a Subscription-as-a-Service (SaaS) model is working for this provider of cybersecurity solutions. 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 March 18, 2024.

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