Cabot Stock of the Week Issue: May 1, 2023

Stocks continue to creep higher while volatility (at least according to the VIX, i.e., the “investor fear gauge”) keeps sinking lower. That’s a good combination, especially given the backdrop of a decidedly mixed earnings season, yet another bank failure (First Republic finally fell victim, with JPMorgan and the FDIC coming to the rescue), and another interest rate hike (probably 25 basis points) likely coming this week. So today, we add another growth stock to bring our Stock of the Week portfolio to the maximum capacity of 20 stocks. It’s a reflection of a relatively healthy stock market – or at least one that’s less infected than it was in 2022. If it can weather another pivotal few weeks of earnings season, more Fed speak, and ongoing debt ceiling, regional bank failure, and recession fears (side note: my family and I went to Disney World on vacation last week, and I saw exactly ZERO signs of a recession there, in the airports, in the restaurants, etc.), then perhaps there’s a real rally on the other side of all this chop. We’ll see.

In the meantime, I’m adding another up-and-coming retailer in the hopes that it can become our next ULTA, WING, or XPOF – all of which are hitting new all-time highs as I write this! It’s a company that Cabot Growth Investor Chief Analyst Mike Cintolo thinks looks like a real leader in the sports apparel arena. Here are Mike’s latest thoughts on it.

On Holding (ONON)

On Holding (ONON) continues to quack like a new leader in the retail space. It’s a high-end sports shoe outfit (many go for $150 or more) geared toward runners and (as it expanded its offerings) other activities (trail running, hiking) and sports (tennis) as well as apparel. And, as opposed to most peers, the firm does seem to have something different, as years of research have led to offerings that really are better for athletes, with softer cushion when landing but some spring when pushing off (they call it “cloud” running, as it’s supposed to feel that cushy), leading to better performance. That’s all definitely a good thing, as On continues to take share—but the bigger opportunity, and one that looks to be playing out, is that On is joining the Lululemons of the world and becoming a lifestyle brand, with many sort-of-athletes buying the shoes simply to wear around due to their comfort and because it’s a “hot” brand. Both of those factors combined have the firm growing like mad—in Q4 (reported in late March), local currency revenue (On is based in Switzerland) rose 92%, with strength seen in direct-to-consumer (up 76%), wholesale (up 104%) and with in-person sales up 80%-plus in every region around the globe. Better yet, gross margins remained unchanged despite cost pressures, which helped EBITDA lift more than five-fold.

Looking forward, the expansion potential in the U.S. is huge—the firm has already broadened its offerings to tennis shoes and trail running shoes, with expectations for continued new targeted products for different sports and kids down the road (not to mention apparel, which makes up around 5% of revenues). Then there’s the fact that On’s higher-priced shoes (the $150 ones) have become something of a lifestyle brand for the upper middle class, with many wearing them on a daily basis for comfort and fashion (the firm has an all-day wear lineup just for these people).

Growth has been fantastic on both the top and bottom lines and 2023 is expected to keep that going—the top brass sees revenues up at least 39% (in local currency terms) with a very healthy EBITDA margin of 15%, though analysts think even that will prove conservative. The big idea here is that On looks to be the next big sports retail brand of sorts, hoping to follow the path of a Lululemon or Under Armour to become much, much bigger over time. Earnings are due May 16.

As for the stock, ONON took on some water today after Crocs (CROX) got taken apart on earnings, but to this point, the selling has been well-controlled—shares only dipped to their 25-day line before bouncing. We can’t rule out more wobbles, of course, but we’re impressed that the stock hit new closing highs last week despite the tricky environment; all told, ONON still acts like a new, fresh leader that likely blasted off in March.

Current Recommendations

Changes Since Last Week: None

No sells today, which means we have now reached our 20-stock cap with the addition of ONON. Next week, something will have to go. It’s a good problem to have, and one I was willing to push off for another seven days since so many of our holdings look so darn good! Four of our stocks, including the three I mentioned in the opening, are at all-time highs. A couple others are at 52-week highs. Nearly all of them are up since we recommended them.

It can change at any moment in this market, especially given all the potential potholes both this week and beyond that I detailed in the intro. But for now, the good times are rolling in the Stock of the Week portfolio. Here’s what’s happening with all our stocks.

Updates

BYB (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, had a nice debut week in the portfolio, jumping to 60 from 58 after the company reported a five-fold increase in its first-quarter profit, reported on Thursday. Net profits reached $596 million (4.13 billion yuan), up 410% from Q1 a year ago, while revenues improved by 80%. The company sold 552,076 new energy vehicles in Q1, up 92% from a year ago. And as Carl noted in his update last week, the electric vehicle maker made a “favorable impression at the Shanghai auto show by showcasing an $11,300 electric car called the Seagull. BYD continues to gain market share in China and is launching an overseas expansion in Southeast Asia and Europe.” BUY

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, held firm in the 46-47 range after falling sharply the week before. In his latest update, Bruce wrote, “There was no significant company-specific news in the past week. Tech distributor CDW Corp (CDW), considered a benchmark indicator of demand for tech gear, provided a disappointing revenue outlook. The news led to a sell-off in tech equipment companies like Cisco.

“CSCO shares … have 40% upside to our 66 price target. The valuation is attractive at 8.9x EV/EBITDA and 12.6x earnings per share. The 3.3% dividend yield adds to the appeal of this stock.” BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, gapped up nicely after reporting better-than-expected earnings results last Thursday. Adjusted earnings of 92 cents per share were 15% better than analyst estimates and a 7% increase from the same quarter a year ago. Revenues declined 4.3%, not as bad as the 5.4% dip analysts were expecting. So, the stock leapt from 36 to 41, its highest point since last July. We are now up more than 28% on this stock in exactly six months. 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 despite reporting mixed earnings results last Thursday. The pharmaceutical giant missed on earnings estimates and revenue declined 11% year over year, but they raised full-year guidance. The real good news was the company reported positive data on its weight loss drug tirzepatide, as patients who were overweight and had Type 2 diabetes lost between 30 pounds and 34 pounds on average depending on the dose they took, compared to just seven pounds in the placebo group. Lilly plans to complete its tirzepatide application with the FDA in the coming weeks – pushing shares above 400 for the first time ever. We now have a 22% gain on the stock in just six weeks! BUY

Gates Industrial Corp. (GTES), originally recommended by Bruce Kaser in the Buy Low Opportunities Portfolio of his Cabot Undervalued Stocks Advisor, has been holding firm at 13 since early March. That could change this week: the company reports earnings on Thursday, May 4. The stock has 20% upside to Bruce’s 16 price target. BUY

Kimberly-Clark de México (KCDMY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, reported solid quarterly numbers last Tuesday. Adjusted earnings per share were $1.67, up 24% year over year and much higher than estimates ($1.30-$1.34 range). Sales came in at $5.2 billion, 2% higher than in Q1 a year ago. Despite those strong results, the stock is down slightly from last week thanks mostly to a 3.5-4% dip this morning on no apparent news. Still, the growth is encouraging. The Mexican subsidiary of Kimberly Clark is a play on Mexico’s manufacturing costs now being about 25% lower than China’s, making its companies more appealing to global shoppers. BUY

Las Vegas Sands (LVS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is up to its highest share price since January 2020! The stock is still riding high after better-than-expected earnings two weeks ago. Fourth-quarter revenue exceeded analyst estimates by 16%, while EPS came in 15% higher as the company’s Macau casinos continue to benefit from China’s post-Covid reopening. Revenues improved to 125% year over year and reached $2.12 billion – its best quarter since 2019, before the pandemic. The stock is up 27% since we added it to the Stock of the Week portfolio in early January. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, gapped up to new 52-week highs after reporting stellar earnings last Tuesday! In its fiscal third quarter, Microsoft’s revenue improved 7% year over year, while net income increased 10%. Both numbers were well above consensus estimates. Search was the biggest revenue driver, as the company’s Bing search engine is undergoing a resurgence thanks to its new artificial intelligence software, ChatGPT. AI also powered 27% growth in the company’s Azure cloud computing business. The stock is now up 27% year to date, and we have roughly a 20% return in less than two months. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in his Cabot Explorer advisory, came back to earth a bit this week after hitting all-time highs the week before. We still have a very big gain on NVO, and the pullback looks very normal. In his latest update, Carl wrote, “Last week, the company announced a share repurchase program and increased guidance for 2023. Its popular drug Ozempic is approved for Type 2 diabetes, but people have been taking the drug for losing weight because of its effectiveness. Ozempic sales soared 77% last year to $8.8 billion.” BUY

Realty Income (O), originally recommended by Tom Hutchinson in Cabot Dividend Investor, keeps holding in the 61-62 range, where it’s been all month. In his latest update, Tom wrote, “In a highly uncertain environment like this, where the narrative can change on a dime, income is king. And this legendary income REIT is the king of income stocks. The returns haven’t been inspiring so far. But this stock has held its own in a bear market. As the economy slows and moves towards recession, investors will continue to demand safety and O is a highly desirable safe income stock.” HOLD

Sensata Technologies (ST), originally recommended by Bruce Kaser in the Buy Low Opportunities portfolio of his Cabot Undervalued Stocks Advisor, broke down after earnings last week, falling from 47 to 43 despite topping top- and bottom-line estimates. The 92 cents per share in earnings were ahead of the 78 cents the company reported in the first quarter a year ago as well as the 87 cents a share analyst expected, while revenues improved 2.3%. But those results apparently weren’t enough to satisfy investors, and shares tumbled. Given the strong results, we’ll hang tight with a Buy rating, as the stock now has 74% upside to Bruce’s 75 price target. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was quiet this week following the big earnings-induced tumble the previous week. Investors are likely still processing the Q1 results against the backdrop of all the price cuts (six of them!) this year. As a reminder, earnings per share declined 23% year over year, while Tesla’s famed margins dipped below 20% for the first time in years. We’ll see what happens going forward. With the stock down 25% from its mid-February highs, there could be plenty of upside here, but we’ll keep it at Hold. HOLD

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, has been stuck in a range between 30 and 32 for more than a month. This seems like a very normal holding period after shares of the ride-sharing giant had broken out in January and early February – the stock is still up 32% year to date and trades above its 200-day line (29). The company reports earnings tomorrow (May 2), and shares are up more than 5% today, which seems like a good sign. Perhaps a breakout is forthcoming. Analysts are anticipating a 27% revenue increase and much narrower EPS losses than a year ago. Stay tuned. BUY

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to rebound beautifully after its first real dip of 2023, recovering basically all its early-April losses when the stock plunged from 551 to 520 in three days. Shares are now up 16% year to date, and more than 40% since we recommended it a year ago. BUY

UnitedHealth Group (UNH), originally recommended by Tom Hutchinson in Cabot Dividend Investor, recovered most of its losses from the previous week as investors digested the company’s mostly strong Q1 earnings. In his latest update, Tom wrote, “This recent portfolio addition has strong predictable revenues in a very defensive business ahead of a likely recession later this year. UNH has been a terrific stock to own in any market, as its three-, five- and 10-year returns attest. But it is also the epitome of a stock to own during an economic downturn. It pulled back since being added to the portfolio, but I expect the stock to be solidly higher in the months ahead.” BUY

Visa Inc. (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor, didn’t budge net-net since our last issue, but tumbled all the way to 228 after earnings last Tuesday, despite the fact that it beat analyst estimates on both the top and bottom lines. In its fiscal second quarter, the credit card giant reported 11% revenue growth and 17% EPS growth, while transactions were up 12%. Initially, investors still somehow didn’t see enough that they liked in the report, and briefly sold out of V. But as a few days have passed, enough buyers have moved in to return the stock to its rightful 233-234 range. Any move above that range would be bullish. BUY

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, kept rising to new all-time highs ahead of earnings this Wednesday. In his latest update, Mike gave a glowing yet cautious review: “Wingstop (WING) looks great, motoring to new highs and helped this week by a barnburner of a quarterly report from fast-casual peer Chipotle—raising hopes that the firm’s own Q1 report (due May 3) will be pleasing, too. That said, we’re actually going to use this pop to sell one-third of our position for a couple of reasons. Shares are extended a bit headed into earnings; are sitting right at round-number resistance (near 200) and WING has generally been advancing all year (with fits and starts of course). Throw in the renewed growth stock weakness and we’ll take partial profits, selling one-third and holding the rest. Note that, as with most of these partial sales, we’re hoping it turns into a big mistake—we’d be thrilled to see our remaining (two-thirds) of a position go wild on the upside. But given all the evidence, we think pruning makes sense.” Since we recommended WING later than Mike, our returns are a bit more modest, so we’ll keep it at Buy even with earnings looming. 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, keeps holding its highs in the 32-33 range ahead of earnings this Thursday, May 4. Analysts are looking for 30% revenue growth and for EPS to turn positive (13 cents) after a 19-cents-per-share loss a year ago. We now have a better than 80% return on this stock in seven months. If you got in early, I recommend selling around a third of your position to book some profits – preferably before earnings this week. For everyone else, it’s still a Buy. BUY

The next Cabot Stock of the Week issue will be published on May 8, 2023.