Cabot Stock of the Week Issue: March 25, 2024

Yet again, the Fed and Jerome Powell were more help than hindrance to stocks, sending the market to new highs after reiterating their intention to cut interest rates three times before the year is out. Any change in that stance could result in some 2022-esque market turbulence, but for now Wall Street believes them. And the bull market is as strong as ever, despite a slowdown in the artificial intelligence hype cycle.

Some non-AI winners are emerging. Today, we add one of them – a once-great MedTech stock that got slashed in half (and then some) in 2022 but is now back with a vengeance, trading at new all-time highs. And now, it just gained FDA approval on what could be its next big thing. That was enough to convince Tyler Laundon to add the stock to his Cabot Early Opportunities portfolio. This week, we add it to our Stock of the Week portfolio.

Here are Tyler’s latest thoughts.

Intuitive Surgical (ISRG)

Just over two decades ago, Intuitive Surgical (ISRG) disrupted the surgery market by introducing the first generation of its robotic surgery platform, the da Vinci system.

When the FDA first approved it in 2000, the da Vinci system allowed surgeons to complete relatively complicated procedures with far greater precision. In the years since, the company has pushed the innovation envelope further and grown into one of the most successful MedTech companies in history.

With the FDA just recently approving Intuitive’s latest generation multiport platform, da Vinci 5, the company is preparing for the next chapter of its growth story.

This is among the biggest stories in surgery and analysts are musing about da Vinci 5’s potential to slingshot robotic surgery forward. Bank of America theorizes it could get robotic surgery to “industrial scale.”

Da Vinci 5 has about 150 design improvements over earlier generations, including 10 times the computing power, better surgical precision and the option to use a host of proprietary, high-performance surgical tools that were previously provided by outside vendors (da Vinci 5 is still an open platform so surgeons don’t have to use these new tools).

One of these is an insufflator with low-pressure capabilities. These devices help moderate pressure, create an air barrier and evacuate smoke, all of which speed recovery time.

Force feedback instruments are another option. These instruments measure exerted force on tissue in real-time and relay the data back to instruments to exert force. In time, visualization capabilities will be improved with natural 3D surgical imaging.

Turning to financial impact, management did not change guidance and consensus estimates have not yet moved to include da Vinci 5 contribution. This is likely to be a slow burn at first, then accelerate as more units are placed and procedure volume, surgical tools and procedure categories grow.

One area of future growth will be sales of traded-in and refurbished earlier-generation robotic surgery systems (i.e. da Vinci Xi). It’s possible a good portion of these will go to overseas markets (Latin America, Middle East and India).

Intuitive will also offer a free year of access to its computational observer software, Case Insights, which includes surgical video training and key performance indicators (KPIs). This should help the company grow overall software application revenue.

Of course, the bigger impact will come from placements of da Vinci 5, which will start slow then grow over time. The priority will likely be large hospital customers and clinical testing sites, i.e., locations with the most capacity constraints.

System Average Selling Price (ASP) should be about 30% higher than current robots (investors had thought it would only be 15% to 20% higher). That said, customers who opt to buy Intuitive’s optional instruments instead of those from third-party providers will save money on those components. Depending on what they buy, ASP could be up 9% to 15%.

As I mentioned, forward estimates have yet to change but it’s inconceivable that da Vinci 5 won’t boost results. Our uber-conservative baseline is to look for revenue growth of 12.3% ($8 billion) in 2024 (no Da Vinci 5 contribution) accelerating to 15.6% in 2025. EPS should rise from $6.26 (+9.5%) this year to $7.29 in 2025 (+16.5%) and probably near $9.00 in 2026 (+23.5%).

As for the stock, ISRG came public at 9 on June 13, 2000, and after a few stock splits is up a cool 18,000% since (average annual return of almost 25%). Buy and hold, anybody?

More relevant to today, shares recently hit an all-time high of 403 a couple of weeks ago after a steady rally from 255 at the beginning of November. That rally came after a 100-point, multi-month drawdown that began last summer. For the last two weeks, shares have been moving sideways in the 377 to 403 zone.

Current Recommendations

Changes Since Last Week:
Soleno Therapeutics (SLNO) Moves from Buy to Sell

As I’ve been writing for weeks, our portfolio is too big, and I’d like to cut it down to at most 25 stocks. I’m not going to force it by banishing perfectly good stocks with plenty of upside, but I am being less forgiving than usual with our laggards, which is why this week Soleno Therapeutics (SLNO) had to go after a short stint. With the addition of Intuitive Surgical (ISRG), that still leaves our portfolio with a whopping 28 stocks, so there will likely be more trimming ahead in the coming weeks, though I won’t be doing so haphazardly.

It’s a good problem, having too many stocks that are acting anywhere from pretty well to very well to easily cut ties with them. But I do think 25 positions would be a far more manageable, reasonable portfolio cap.

For now, though, here are the mostly very good things happening within our outsize portfolio.

Updates

Alexandria Real Estate Equities, Inc. (ARE), originally recommended by Tom Hutchinson in the Safe Income Tier of his Cabot Dividend Investor advisory, remains in the 123-128 range that it’s been in for more than a month, though came close to busting through 128 resistance after the Fed reassured the market that it still plans on three rate cuts this year. Alexandria is a life sciences property REIT so it’s not feeling the brunt of office closures in a post-pandemic world since many of their properties are laboratories that are essential. And it pays a 4% dividend yield to boot. HOLD

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is up to new 52-week highs above 25! There was no news. The clothing retailer is coming off a strong fourth-quarter earnings report earlier this month: EPS of $0.61, well ahead of the $0.50 expected. Sales also beat estimates and improved 12% year over year. The stock got knocked back to 22 initially, however, since full-year sales fell well short of analyst estimates. Still, the company is growing at a healthy clip, and yet is trading 33% below its 2021 highs. Given the upside, this break to new highs looks buyable if you haven’t already bought. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, keeps hitting new 52-week highs! The stock closed at 12.64 last Friday before pulling back a bit this morning. The U.K.-based life insurance and investment management company has been riding the wave of a strong earnings report in which full-year 2023 operating profits improved 9%, net insurance revenues increased 8.5%, and the return on equity was 14.7%. Also, the company said it will continue to return cash shareholders with a 5% dividend raise later this year, and with a new £300 million share repurchase program just underway, which will reduce share count by 2%. AVVIY shares still have 12% upside to Bruce’s 14 price target. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up along with the market, rising to 129 from 125. As long as the bull market remains intact, this “Bull Market Stock” is a good way to ride the momentum. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, had quite the bounce-back after a couple of down weeks, rising about 9.5% since our last issue. It’s still below its early-March highs, but the swift rebound shows that investors have digested the company’s mixed earnings results from earlier this month – in which it beat EPS and revenue estimates but semiconductor sales fell short of expectations – and realized they weren’t so bad. With momentum back, but with the stock shy of its highs, this looks like a good entry point for those who aren’t yet in. BUY

Cisco Systems, Inc. (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Value Investor, has been chopping around between 49 and 50 all month. There’s been no news. A move above 50 would be bullish. Shares have 32% upside to Bruce’s 66 price target. And the stock trades at just 13.4 times forward earnings estimates. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, had a nice bounce-back week, advancing 3.4%, from 317 to 328, to recover most of its mild March losses. In his latest update, Mike wrote, “Given the wobbles in technology stocks, the poor action among its cybersecurity peers and CRWD’s own wild post-earnings reaction, we’re half-encouraged with how the stock is behaving, calming down a bit and holding the 50-day line on a test earlier this week. Long term, we think the stock is an established leader and has a bright future thanks to its rapid, reliable growth outlook both for the quarters ahead and for the next few years. Near term, though, we’re remaining flexible—a decisive break lower from here (likely coinciding with a crack in many tech leaders) may have us trimming our position, though we wouldn’t trim too much given that our stake isn’t big for us. Conversely, a clear show of strength in leaders and CRWD could have us restoring our Buy rating, and potentially buying more.” We’ve kept CRWD at Buy and will keep it right there even though it is now officially a double! BUY

Dave & Buster’s (PLAY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has broken below its monthlong 61-64 range, dipping to 60 this morning on no news. Earnings are due next week, April 2, and analysts are looking for 40% EPS growth on 7.1% revenue growth, so this mini-dip could be short-lived if the retailer can top those estimates, as it’s done in three of the last four quarters. Keeping at Buy for now, but further weakness ahead of the earnings report could prompt us to reconsider. BUY

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, finally broke above 45 resistance, touching as high as 48 before pulling back this morning. In his latest update, Mike wrote, “DKNG has perked up in recent days, testing the top end of its month-long range, partly due to a small management shakeup announced earlier this week (the current CFO is moving to a different role to wring more efficiencies out of the operation), but also likely due to the start of March Madness this week, which is one of the bigger sports betting events of the year. In the last issue, we said that, even though we were shaken out of some shares during DKNG’s last correction, we’re not afraid to add some back if the stock emerges from its rest period, so we’ll see how it goes—in the meantime, not to sound like a broken record, but we’ll stay patient and wait for the stock to show its intermediate-term hand.” We’ve stayed on Buy and will keep it right there now that the stock has broken out. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, keeps holding firm in the low 770s. It’s possible the weight-loss drug superstar is biding its time before another big push. Here’s what Tom had to say about it: “Even this healthcare juggernaut flirted with a pullback but has since recovered. LLY had fallen about 4.5% after the announcement that the FDA decision regarding approval of its high-potential Alzheimer’s drug Donanemab will be delayed. A decision had been expected in the first quarter but will now likely be later in the year. But it’s just a delay, and the stock appears to be back in business. Lilly again killed on earnings and guided higher for 2024. The same great story is still very much in place.” BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, crept slightly higher after rising 15% the previous week, as cannabis stocks are coming back in favor ahead of potential approval of marijuana as a Class III (i.e., less harmful) drug from the Drug Enforcement Administration as early as next month. This is why we have cannabis exposure in the portfolio: any good news about the sector results in huge, swift run-ups. Suddenly, we have a nice gain in GTBIF – with the possibility that it may go much higher. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, was flat in its first week in our portfolio. Here’s what Tom had to say about it in his latest update: “Although this newest portfolio addition is currently selling near the 52-week high, it is still reasonably priced at less than 1.6 times book value and most other valuation measures below the 5-year average. It also pays that safe and high dividend every single month with a strong possibility of supplemental dividends over the course of the year as well. MAIN should also provide strong total returns over time generated by its largely successful small business portfolio.” BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, is up to new 52-week highs! Here’s what Tyler had to say about it in his recent update: “Microsoft (MSFT) continues to look fantastic and hit a new high last Thursday. The latest news came out of Microsoft’s second annual Secure event, which was focused on Copilot for Security and all the ways Microsoft is going deeper into the security market with this solution. While not expected to be a major revenue driver in the immediate term, the company’s strategy to broaden AI use across its security suite is likely to drive significant revenue down the road as security analysts flock to its solutions.” BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, is also hitting new 52-week week highs! Here’s Tyler again on why: “Netflix (NFLX) is also acting very well and shares are within a stone’s throw of the November 2021 all-time high. The company is accelerating revenue growth and free cash flow, as well as expanding margins, as it focuses on paid sharing, with advertising another likely tailwind over time. Netflix is moving toward becoming the world’s default streaming service provider.” BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, dipped below recent support at 131, although barely, down to 130 as of this morning. Such pullbacks are normal for a stock that’s been on the kind of tear NVO has been on the last year-plus, and there’s still a lot to like about the Danish drugmaker-turned-overnight-sensation thanks to Ozempic and Wegovy. Carl noted in his latest update, “The company’s diabetes and weight loss drugs are in strong demand, leading it to recently acquire Catalent to increase its production capability. There are an estimated 800 million people with obesity worldwide, and only 2% of these patients are being treated.” That’s more than enough reason to give NVO a very long leash – especially after the stock has nearly doubled since we added it to the portfolio. BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been in the 62-65 range for the past month. In his latest update, Mike wrote, “NTNX has fallen off a bit in recent days, but compared to other tech leaders, it remains in good shape, dipping to the rising 25-day line. The company has been whisper quiet since its late-February quarterly report, but it’s clear from the action of the past few months that big investors see the very bullish demand environment combined with the firm’s mature subscription model (free cash flow margins for the current fiscal year ending in June expected to be 20%—and that’s likely conservative) producing plenty of growth ahead. We’ll stay on Buy.” So will we. BUY

Palantir Technologies Inc. (PLTR), originally recommended by Mike Cintolo in Cabot Top Ten Trader, held firm at 24. This later-stage artificial intelligence play had a huge gap up from 16 to 25 in the first half of February but has mostly been stagnant since. Given the accelerating growth (19.7% revenue growth in the last quarter, another 19% expected in the current quarter), another leg up seems possible, if not likely. So, we’ll stick with it despite the recent malaise. BUY

PayPal (PYPL), originally recommended by Carl Delfeld in his Cabot Explorer advisory, kept creeping higher, rising to 66 from 64 on no news. Shares are now up 10% in March after starting the month at 60. And yet, they trade at nearly 80% below their 2021 peak. According to Statista, PayPal and its 423 million users account for nearly half of all online payment processing activity. And yet its share price is barely more than a fifth of where it was less than three years ago. Seems like investors are starting to notice. BUY

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, loved Jerome Powell’s reiteration of three rate cuts this year, popping from 110 to 116 – a new all-time high! In his latest update, Mike wrote, “The growing uncertainty about inflation, interest rates and the Fed has been playing with many homebuilding stocks, and it hasn’t helped that some recent earnings reports (like last week’s release from Lennar) were poorly received. Even so, the group as a whole and PHM in particular have held up well given all the uncertainties, with shares holding north of their moving averages as earnings estimates remain buoyant (around $12 per share for 2024). We’re open to anything, but right now we think the trend of the stock and business are still clearly up.” That’s true. And we have a 28% gain in PHM in less than four months as a result. BUY

Qualcomm, Inc. (QCOM), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was up from 166 to 167 as its recovery continues. In his latest update, Tom wrote, “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 ending, and AI is coming to mobile devices. QCOM has been pulling back along with the sector over the past couple of weeks after a huge rally in which it had risen 22% YTD and 65% since late October. A breather is a healthy thing for the stock. The rest of the year looks strong as Qualcomm is also introducing new AI chips for PCs and smartphones that could be big sellers.” BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has been in steady retreat since getting off to a great start in our portfolio at the beginning of the month. It’s down to 54 from a high of 60. Still, the stock is well above its 50- and 200-day moving averages. The South Korean company is coming off a strong year in which all three of its major businesses showed net profits. 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, was up 2% but remains within the 740 to 780 it’s been in for six weeks. 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, dipped to recent support at 42, though it’s up in early trading today. We need to keep trimming our portfolio to make it less bloated, and this is the place to do it. With a 9% loss in less than two months, it’s time to sell. I like the premise of this development-stage biotech that may have a cure for Prader-Willi syndrome, but right now it feels too speculative and not reliable enough to remain in a portfolio that is otherwise chock-full of strength and reliability. Moving to Sell. MOVE FROM BUY TO SELL

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is still stuck in the mud, holding firm in the low 170s. The only real news is that Mizuho bumped TSLA down from Buy to Neutral and slashed its price target from 272 to 195 – quite the reduction. Mizuho said its rationale isn’t necessarily an indictment of Tesla specifically, but more a comment on the stagnating electric vehicle landscape, where growth has slowed in recent months. We still like the upside, as TSLA has made a habit of proving people wrong every time it’s been counted out over the last half-decade or so. Keeping at Hold. HOLD

Tripadvisor (TRIP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, finally broke above 27 resistance, stretching to the mid-28s on no news. The post-Covid travel boom is alive and well, and we’re reaping the rewards with a gain of more than 40% in just two months. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, had a nice bounce-back this week after a brief dip, rising to 80 from 76. In his latest update, Mike wrote, “Uber (UBER) retreated to its 10-week line on Tuesday for the second time since it got going in November, and it’s found support there as it ‘should,’ quickly recouping about half of the minor losses of late. Of course, that doesn’t mean the stock can’t correct further at some point, but if the market remains in a general bull mode, we’re thinking Uber’s huge outlook for the next three years (along with a good-sized share buyback program) will keep big investors holding and adding to their positions. We’ll stay on Buy.” So will we. BUY

Varonis (VRNS), originally recommended by Tyler Laundon in Cabot Early Opportunities, dipped from 49 to 48 this week. In his latest update, Tyler wrote, “Varonis (VRNS) has been hovering within a few percentage points of the 50 level since reporting Q4 results in early February. Nothing new to the story. The transition to the SaaS business model is tracking ahead of schedule (this is one of the main reasons I recommended the stock), now expected to be complete in 2026 versus 2027.” BUY

Worthington Enterprises, Inc. (WOR), originally recommended by Bruce Kaser in the Buy Low Opportunities portfolio of his Cabot Value Investor advisory, got knocked back to 62 on earnings last Wednesday. The company reported a decline in both revenue and EPS on an adjusted basis, due partly to lower volumes in its Building Products segment. The good news was that its Consumer Products segment saw higher volumes and margins, but it’s clear Wall Street is focused on the bad news at the moment. A dip below the 61.5 level could be a short-term red flag. For now, the stock has simply pulled back to where it was before the report. 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 April 1, 2024.

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