Cabot Stock of the Week Issue: March 4, 2024

Stocks have been marching higher for four months, with the S&P 500 up 25% since the late-October bottom and the tech/artificial intelligence-heavy Nasdaq up more than 27%. At some point, the party will come to an end, or at least the lights will get turned off for a bit, but until the music stops playing, we plan to keep dancing. It’s worked out well for us: more than two-thirds of our stocks are up double-digit percentages, with three of them up by at least triple digits!

So today, we take yet another big swing, this time in a stock that was already a home run for Cabot Explorer Chief Analyst Carl Delfeld several years ago … before Covid hit and the bottom fell out. Now, it’s back again, but miles shy of its pre-pandemic highs. Longtime Explorer readers will recognize the name, though it’s not so familiar to U.S. investors, which may be a plus as more Westerners discover it.

Here it is, with Carl’s latest thoughts.

Sea Limited (SE)

Sea has three core businesses: 1) digital gaming/entertainment, 2) e-commerce, and 3) digital payments and financial services, known as Garena, Shopee, and SeaMoney, respectively.

Garena is a leading global online games developer and publisher. Shopee is the largest e-commerce platform in Southeast Asia and Taiwan. SeaMoney is a leading digital payments and financial services provider in Southeast Asia.

Some of you may recall this stock, which was an Explorer recommendation in the fall of 2019 at around 30 and became more than a 10-bagger to its 2021 high. During its rise, I suggested several times for members to take partial profits, so if they followed this advice their profits were less than 10X – but who’s complaining?

The stock eventually came back to earth primarily because its explosive revenue growth slowed a bit and expenses also kept rising so losses were persistent and large. Since its high, the stock has retreated nearly 90% from that peak even though Sea’s management finally got control of its expenses. And though revenue has continued to grow, albeit slower than before, management made good on its promise to show some profits through cost-cutting and efficiency measures.

A key challenge now is Sea’s gaming arm, Garena. Its big hit game Free Fire led this segment to prominence and fueled the company’s stock surge, but now needs a sequel. However, offsetting this decline is profits in both its Shopee e-commerce segment and its SeaMoney fintech segment. If the gaming group can return to growth and profits, Sea’s stock has the potential to regain its momentum.

Now that the company has achieved profitability and has a strong balance sheet and sizable cash balances, it can also spend to accelerate growth across all three segments. Sea was profitable in the first and second quarters of 2023 but last quarter, on revenue growth of 5%, it reported a loss of $144 million.

Recall that part of the reason for my initial recommendation was because I viewed Sea as a proxy for Southeast Asian economic growth – particularly in its fast-growing digital economy.

Sea’s e-commerce arm, Shopee, is the most visited online marketplace in Southeast Asia and was the third-most downloaded market app in the world in 2023, after Temu and Amazon. Online sales represent just 8% of total retail sales in Southeast Asia, much less than 22% in nearby China, so there is plenty of room for catch-up growth.

SeaMoney’s fintech services revenue increased 36% year over year in the third quarter. The missing piece is getting Sea’s gaming arm, Garena, back to the high-growth days by leveraging its sizable gaming user bases.

Sea stock represents high growth potential and trades at an attractive value at about two times sales and 15 times forward earnings growth projections. One important thing to note before you buy: Sea is scheduled to report earnings today, Monday, March 4.

Current Recommendations

Changes Since Last Week:

Elastic (ESTC) Moves from Buy to Hold

No sells this week, which means we are now up to 29 stocks – the most bloated this portfolio has ever been. It’s a reflection of both the market’s and our stocks’ strength that there have been so few worth kicking to the curb, though 29 stocks is admittedly too many. I’ll be looking for reasons to sell out of our laggards in the coming weeks, though right now, we don’t have many of those.

Elastic (ESTC) has certainly been anything but a laggard, though it did have a rough response to seemingly decent earnings last week, prompting us to downgrade to Hold today. That’s our only change. Virtually everything else in our portfolio is acting well.

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, has recovered all its February losses after jumping to 125 from 120 in the last week. Here’s what Tom had to say about the company in his latest update: “The life science property REIT had mostly a terrible last two calendar years as interest rates rose and the REIT sector took it on the chin. Alexandria also got lumped in with office REITs, which are suffering from the work-from-home trend with low occupancy rates. But the company provides lab space and related offices that aren’t affected. ARE surged far more than its peers in the last two months of last year as the interest rate trade reversed. But it has struggled through most of this year so far as interest rates moved up again amid the stronger economy. Things might be changing though. ARE has broken the downside trend of the last two months while it remains one of the very best REITs on the market.” HOLD

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up a point ahead of earnings this Thursday, March 7. Analysts are anticipating 11.7% sales growth with 35% EPS growth. The clothing retailer has beaten estimates in each of the last two quarters. Shares have been on a tear – up 14% year to date and 39% in the last six months. It’s possible the stock might not do much even if the company tops earnings estimates again, given that run-up. We’ll see. Keep new positions small until after the earnings report. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, held firm right around new highs at 11.50. Shares of the U.K.-based life insurance and investment management firm still have 22% upside to Bruce’s 14 price target. And the 6.8% dividend yield is adding to our total return. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been up and down along with the market of late, with 130 being the ceiling and 121 being the floor. As long as the bull market remains intact, however, this mega-cap will remain in our portfolio, as a “Bull Market Stock” (Mike’s term) that tends to outperform in strong markets. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, cannot be stopped, rocketing from all-time highs above 1,300 a week ago to new all-time highs above 1,400 now! It’s up 25% year to date and 60% in the last six months. The latest move is likely an indicator that fourth-quarter 2023 earnings – out this Thursday, March 7 – are strong. As I advised last week, if you got in early after our August 8, 2023, recommendation and are sitting on a gain north of 50% like we are, now is a good time to sell a few shares – especially ahead of the earnings report this Thursday. Officially, however, we’ll keep our rating at Buy, as AVGO has gone nowhere but up for the last four months. BUY

Cisco Systems, Inc. (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Value Investor, kept holding at 48. Shares have 36% upside to Bruce’s 66 price target. And the damage done from an underwhelming earnings report a couple weeks ago has been fairly minimal. This could be a good entry point. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, was down slightly but has recovered most of its late-February losses. In his latest update, Mike wrote, “CrowdStrike (CRWD) has snapped back about as well as anyone could have hoped from last week’s brief plunge after Palo Alto Networks’ own quarterly report. That said, the earnings gauntlet for CRWD is still ongoing—tonight, peer Zscaler (a closer peer than PANW for the company) reports results, and CrowdStrike itself will report on Tuesday (March 5). We’re optimistic the stock can be higher down the road, but with CRWD currently in no-man’s land (bounced back into some resistance) and with earnings coming soon, we’ll just stay on Hold and see how the stock handles the news items in the days ahead.” We’ve kept the stock at Buy despite the fact that it’s nearly doubled since we added it to the portfolio in September, but I agree with Mike that holding off on new buys until after tomorrow’s earnings report makes sense. BUY

Dave & Buster’s (PLAY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, held its gains around 63, an impressive feat on the heels of a 45% run-up in the last three months. There was no news. With no earnings on the horizon, it’s possible the stock will take a breather for a while. But, still trading below its 2017 highs (69), plenty of potential upside remains for this retail turnaround story. BUY

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, shook off the cobwebs from its late-February mini-dip, bouncing off support at 40 to get back to 43. In his latest update, Mike wrote, “DraftKings (DKNG) has bounced around since its quarterly report, though some analysts have offered encouraging words—one bumped up his long-term estimate for the firm’s take-rate as new betting offerings (including gaining share in iGaming) boost that figure. If DKNG can set up properly, we could entertain adding to our small-ish stake, but at this point, we’ll just hold what we have and see if the stock can gain momentum.” We’ll keep it at Buy, and any move above previous highs in the mid-45s would be particularly bullish. BUY

Elastic N.V. (ESTC), originally recommended by Tyler Laundon in Cabot Early Opportunities, got clobbered on earnings last week, with shares plummeting from 134 to 117. But, some perspective: the stock was at 52-week highs prior to the report and remains well above its 200-day moving average after it. Here’s what Tyler had to say about it, in a special bulletin to his readers late last week: “The company reported Q3 fiscal 2024 results yesterday that, while 2% better than expected on revenue and pairing nicely with ahead-of-consensus Q4 fiscal 2024 guidance, also showed that the all-important Cloud revenue line (44% of total revenue) decelerated to 29% growth from 31% growth in the previous quarter (i.e., Q2 2024).

“Elastic Cloud is the company’s hosted software and is what virtually all new customers use. The other option is self-hosted software that customers download. That is the ‘old’ way of doing things.

“While it may seem a little silly that 2 points of deceleration in Elastic Cloud would drive the stock down 16% after hours (it improved to ‘just’ -13% pre-market this morning), especially since 29% growth slightly surpassed expectations, the reality is the stock ran higher into the event as investors prepared to be wowed.

“They weren’t.

“Turning back to the quarter, revenue grew by 19.4% to $328 million (beat by $7.2 million) while EPS grew 112% to $0.36 (beat by $0.05).

“It was actually self-managed subscriptions that helped the company beat Q3 expectations. Worth noting that, while investors are zeroed in on Cloud, management isn’t 100% pushing it over self-managed. They prefer Cloud, but it’s more important to land customers.

“Another positive was that Elasticsearch Relevance Engine (ESRE) pulled in several hundred customers for the third consecutive quarter. This solution allows customers to build generative AI apps quickly and without model training. The small business market remains a bit weak but among larger enterprises, the generative AI use cases and attraction of Elastic’s RAG (Retrieval-Augmented Generation) technology, which helps users save money as they build data-intense applications, continue to set Elastic apart from the competition.

“On Q4 guidance, management said to expect 18% revenue growth (about $329 million) and EPS of $0.18 to $0.20. No guidance for fiscal 2025 was given, yet.

“Stepping back, this really was a perfectly good quarter. Yes, growth could have been more spectacular and the stock will likely take a step back as more modest expectations settle in. But there’s no reason to think revenue growth of around 18% this fiscal year (just one quarter left) can’t be matched, or exceeded, in fiscal 2025. Or that EPS growth won’t exceed earnings growth by a few points.

“Elastic remains a solid mid-cap pick that should benefit from AI-related tailwinds over the longer term given its strength in search-related generative AI, with observability and security representing other markets with upside.”

Tyler already had a Hold rating on ESTC and kept the rating in place until the selling subsides. We entered last week’s earnings report with a Buy rating, so let’s downgrade to Hold as well, at least until the stock can right itself – no point in trying to be a hero in one of our few stocks showing weakness. MOVE FROM BUY TO HOLD

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is hitting new highs yet again, rising another 2.3% since our last issue. Its position, with Mounjaro, as one of the two leaders (along with Novo Nordisk, see below) of the weight-loss drug boom continues to drive the stock to greater heights, making it our single best performer in the last year – it’s up 135% since we added it last March! As I’ve been writing for weeks, take some profits if you haven’t already done so. But given the strength of the obesity drug trend, we’ll let the rest ride. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, has pulled to February lows in the high 12s after topping out above 14 two weeks ago. The company reported fourth-quarter and full-year 2023 earnings last week, which didn’t move the needle much. Revenue improved 7% year over year and GAAP net income rose to $3 million. In the quarter, the company opened seven new RISE dispensaries – six in Florida and one in New York. For the year, revenue improved 4% from 2022 while cash flow from operations increased 42%. All those numbers are “fine,” but not enough to impress investors. What would really impress them is if the Drug Enforcement Administration (DEA) approves rescheduling cannabis from a Schedule I to a Schedule III drug; it’s possible such a ruling could come in the next month. And that’s why it’s worth having GTBIF in your portfolio. 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. Keeping at Hold for now, though a dip below 42 would likely prompt us to sell. HOLD

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, has been in steady recovery mode since a mid-February dip. There’s been no major news, though Nvidia’s blowout earnings certainly helped give shares an extra boost, as the two companies occupy the same AI leadership space. A recent buy of French AI start-up Mistral further buttressed that leadership position. Mistral is the second company to provide commercial language models (which power generative AI) available on Microsoft’s Azure cloud computing platform. We now have a 62% gain on MSFT in exactly a year. BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, had an excellent first week in the portfolio, advancing 5.6% to reach a new 52-week high! There was no major news, though this Sunday’s Oscars – in which Netflix has 10 films nominated for Academy Awards – could be providing a boost in perception, and perhaps sign-ups, as people seek out nominated films before the awards show. Longer term, we like this “hiding in plain sight” mega-cap tech stock because it has weathered heavy competition from a variety of well-financed streaming rivals (Amazon, Apple, Disney, etc.), and has not only fended off all challengers but appears stronger than ever after looking a bit wobbly a year or two ago. As Tyler wrote last week, “The company has the scale, content and growth strategy in place to support several years of double-digit revenue growth, 25% to 30% EPS growth, and free cash flow (FCF) ramp from $6 billion in 2024 to $20 billion in 2026.

“That potential already has a good number of analysts pounding the table on shares. The evolution of the story will likely pull in many more.” BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, finally broke out of its recent range between 121 and 125 and is up to new highs above 128 as of this writing. Like Eli Lilly, the company has been transformed into a pure growth stock thanks to its two weight loss drugs, Ozempic and Wegovy. In 2023, Wegovy sales soared by 407%, while Ozempic’s sales surged by 60% year over year. We have a 91% gain on the stock – with no let-up in sight. BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, exploded to new highs above 65 after reporting earnings last Wednesday! Here’s what Mike had to say about them: “Nutanix (NTNX) released another very solid quarterly report last night—revenues were up 16%, but annual contract value lifted 23%, recurring revenue was up 26% and free cash flow more than doubled to 54 cents a share (well above the 46 cents per share of earnings), with an outlook that was mostly in line (seeing similar continued growth going ahead). Shares popped a bit on the news, though the movement wasn’t major—which is fine by us, as the stock very much remains ‘under control.’ We’ll stay on Hold tonight as we ride the uptrend but could go back to Buy soon if shares hold these gains.” Well, they’ve held the gains and then some (Mike wrote this last Thursday). So, we’ll stay on Buy – strike while the iron is hot! BUY

Palantir Technologies Inc. (PLTR), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was steady at 24. The stock has mostly been taking a breather since a game-changing fourth-quarter report sent shares up roughly 50% in just a few trading days. With double-digit sales and earnings growth projected this year, this emerging AI play still has plenty of upside. BUY

PayPal (PYPL), originally recommended by Carl Delfeld in his Cabot Explorer advisory, held at 59 since our last issue. As Carl noted in his latest issue, the digital payments company “generated $4.2 billion of free cash flow and bought back $5 billion of shares during the past 12 months. PayPal earnings for the fourth quarter were up 19% on 9% revenue growth to $8 billion.” BUY

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains in the 35-36 range as it has been since a sharp earnings-induced dropoff from 41 in the first half of February. Still, the trend in this social media stock is decidedly up, with shares up 32% in the last six months and trading well clear of their 200-day moving average. Keeping at Buy, though a dip below 35 support would likely prompt us to reevaluate things. BUY

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, broke above 109 resistance to reach new all-time highs above 112! We added this stock as a play on the Fed (eventually) cutting interest rates later this year. Though that hasn’t happened yet, and may not until the second half of the year, when it does, it will be good news for this third-largest U.S. homebuilder. BUY

Qualcomm, Inc. (QCOM), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, keeps hitting new highs! Shares were up another 6% this past week. In his latest update, Tom wrote, “Qualcomm is secretly one of the best semiconductor and AI stocks to own. But it has been held back by cyclicality, both in semiconductors and smartphones. But the negative cycle is coming to an end and QCOM is aching to surge higher. The Semiconductor Industry Association is forecasting 13% growth in worldwide chip sales this year after sales contracted 8% last year despite a rebound in the second half of the year. Leaders like Qualcomm should experience a much higher level of growth than the overall industry. Qualcomm is introducing new AI chips for PCs and smartphones that could be big sellers this year. It’s an AI beneficiary that just hasn’t really had its day yet.” It’s possible that day has arrived. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, gave back some of its modest gains from the previous week. The stock has mostly been in the same 30-point range for the past three weeks. Still, we have roughly a 40% gain in this large-cap cloud software stock since adding it to the portfolio last June. BUY

Soleno Therapeutics (SLNO), originally recommended by Tyler Laundon in Cabot Early Opportunities, gave back most of its gains after touching new highs above 52 last week. There’s been no news. Net-net, the stock is still up 56% in the last three months but keeps running into resistance around 50. 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). While approval of DCCR this year is not a given, the odds are massively tilted in SLNO’s favor. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, just can’t seem to stay above 200 these days. Every time it pokes its head above that level, it immediately gets knocked back to the low 190s, as it is again today. The latest bit of bad news putting downward pressure on the stock is that the lawyers for a Tesla shareholder who successfully argued that Elon Musk does not deserve a $55 billion compensation package are demanding that $6 billion in TSLA stock should be paid to them as a fee. It’s another ugly Musk-related headline but has almost nothing to do with the company or the stock. Chances are, shares will bounce back from today’s headline-induced 6% pullback and will retest the 200 level again before the week’s out. Still, we’ll keep the stock at Hold until it proves it can break through that overhead resistance for more than a few hours. HOLD

Tripadvisor (TRIP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, again held its gains above 27. There was no news. The company is coming off a very strong quarter in which it reported record revenue, and earnings per share ($0.38) blew analyst estimates ($0.22) out of the water. The post-Covid travel boom is alive and well, and we’re reaping the rewards, with a gain of 39% in just over a month. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, is back near mid-February highs of 81! In his latest update, Mike wrote, “Uber (UBER) has stalled out a bit just shy of 80, but of course, this comes after a huge upmove in recent months (basically doubling from its October low), so some wiggles are to be expected. Even so, unless something really big and negative appears on the horizon, it’s a good bet that big investors will likely support shares on dips given the bullish bookings, EBITDA and free cash flow outlook relayed at its recent Investor Day, along with some other tasty tidbits. (Here’s one: For Uber’s delivery segment, 14% of monthly active users bought groceries through the platform in Q4, up from 8% a year ago, while 5% of new Uber Eats users actually come in the door by ordering grocery or retail delivery.) We’ll stay on Buy, but aim for dips and/or keep it small if you want in.” Good advice. Keeping at Buy even with a 130% gain in just over a year. BUY

Varonis (VRNS), originally recommended by Tyler Laundon in Cabot Early Opportunities, held firm around 51. The stock has been in a holding pattern since reporting 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 11, 2024.

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