Cabot Stock of the Week Issue: May 13, 2024

It’s another dreaded inflation week, with the April Consumer Price Index (CPI) number due out Wednesday, and the Producer Price Index (PPI) due out tomorrow (May 14). But there doesn’t appear to be much dread in the market at the moment. The S&P 500 is up 3.75% so far in May, and the Dow was up each of the first eight trading days of the month – the longest winning streak to start the month EVER, according to Ryan Detrick of Carson Research Group. “Sell in May and Go Away” clearly doesn’t apply to this year.

So, we remain in buying mode. And yet, there’s risk of another sharp pullback if the inflation numbers come in too hot again. To play it safe, this week we add a very reliable, large-cap, dividend-paying health insurer that’s been a staple of Tom Hutchinson’s Cabot Dividend Investor advisory for a while. It’s not sexy, but it’s significantly outperformed all major indexes for the past decade and is a good hedge against the potential for more inflation-induced selling … just in case.

Here it is, with Tom’s latest thoughts.

UnitedHealth Group Inc. (UNH)

UnitedHealth Group is a Dow Jones component that is America’s largest insurer and one of the world’s largest private health insurers. It’s a goliath with $360 billion in annual revenues that serves 149 million members in all 50 states and 33 countries. That’s a lot of monthly insurance premiums!

The company operates in two primary groups, UnitedHealthcare and its Optum franchises. UnitedHealthcare provides health insurance and benefits to a wide range, including large national employers, public sector employers, mid-sized employers, and small businesses and individuals. It also provides health insurance for Medicare and supplements as well as employers globally.

The Optum franchise provides direct healthcare, technology services, and prescription drug solutions. Direct healthcare includes an alliance with 70,000 physicians in local medical groups as well as ambulatory care systems and other chronic treatments. The technology provides data and analytics to manage complex administrative and regulatory issues with hospitals and physicians. It also provides a full spectrum of pharmacy care services.

The group provides services at just about every facet of the healthcare process and the full-scale operation provides a powerful alignment of incentives that helps clients control costs better than competitors, which is a massive issue in the industry.

It’s also a huge company and operation. Scale is hugely important in this industry. It enables UnitedHealth Group to keep costs down by virtue of volume, have cash for acquisitions, and wield significant power to adjust rates as prices increase. That’s a huge benefit during inflation.

Although UNH has a long track record of market outperformance, it has lagged lately. It underperformed the market with a total return of just 9% over the last two years and 7% over the last year. Prior to this recent sluggishness, the stock had blown away the S&P 500 in returns in every measurable period over the prior 10 years. Even after the past two subpar years, UNH has a total return of 665% over the last 10 years, which is nearly triple the return of the overall market.

The stock got knocked around with a lot of the defensive dividend stocks as interest rates rose. More recently UNH took a hit because the company got hacked, causing massive disruptions in the industry. Then it got hit again when the Biden administration announced much lower Medicare reimbursements than had been expected, well below what cost increases justified.

But the company seems to have put the recent problems behind it after reporting solid earnings for the most recent quarter. UnitedHealth soundly beat expectations with an 8.6% revenue rise and a better than 10% increase in adjusted earnings from last year’s quarter. The company also issued strong guidance. It was a relief to the market after recent troubles, and the stock has gotten good upward momentum with a 17% move higher in the month since the report.

UNH currently pays a quarterly dividend of $1.88 per share, or $7.52 annualized, which translates to a 1.5% yield at the current price. The payout is well supported with just a 30% payout ratio and the dividend is likely to grow. In fact, the quarterly payout has grown 150% over the past five years, from $0.75 in 2018 to the current $1.88. Companies that grow their dividend tend to be the best market performers as a group over time.

This is a reliable company and stock and recent stumbles have kept the price reasonable. The hardest thing for a company to do is continually grow earnings. But that becomes so much easier when your business grows all by itself because of the aging population.

Health care is a highly recession-resistant business as people tend not to postpone health issues in any economy. UnitedHealth Group is a large, safe business that provides stability in uncertain markets. UNH has a long track record of outperforming the market index with far less volatility and a beta of just 0.56.

Current Recommendations

Changes Since Last Week:
International Business Machines (IBM) Moves from Hold to Sell
PayPal (PYPL) Moves from Buy to Hold

One sell this week, as IBM simply hasn’t performed and its recent earnings report doesn’t inspire confidence that it will any time soon. PayPal is also in the doghouse a bit but gets a stay of execution (for now), as we downgraded it to Hold. Most of our other stocks are acting well, and new addition GoDaddy (GDDY) had an excellent first week, while fellow recent addition Cava Group (CAVA) is shaping up to be our best-timed new buy in a while.

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

Updates

Alamos Gold Inc. (AGI), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, is at new 52-week highs as gold prices remain elevated. There was no news related to the company, but gold prices are spiking again in May, which is lifting all boats among gold stocks. AGI is a Buy as long as gold prices stay high. BUY

Alexandria Real Estate Equities, Inc. (ARE), originally recommended by Tom Hutchinson in the Safe Income Tier of his Cabot Dividend Investor advisory, was flat for the week on no news. In his latest update, Tom wrote, “This one-of-a-kind life science property REIT that owns properties in highly sought-after innovation clusters throughout the country reported strong earnings that beat expectations. Adjusted funds from operations grew at 7.3% over last year’s quarter and the quarterly dividend was raised by 5%. Occupancy and the rate of acquisitions reflected a solid business and the dividend hike showed confidence. The REIT is somewhat at the mercy of the interest rate narrative in the near term but ARE is a great income stock selling at the low end of historical valuations.” HOLD

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, keeps holding at 24, with 25 acting as overhead resistance in the last month-plus. The recent dip in consumer sentiment/confidence may also be limiting the stock somewhat. Still, we have a 41% gain in just over six months. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, is having a very good May, recovering nearly all of its April losses. After bottoming at 11.44 in mid-April, the stock is up more than a dollar. The number to keep an eye on is 12.7, AVVIY’s high point in late March. A move above that level would be quite bullish. Shares of this U.K.-based life insurance and investment management firm still have 12% upside to our 14 price target. The 6.7% dividend yield makes it even more attractive. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up from 121 to 124 as this Bull Market Stock (Mike’s term) continues to recover along with the market. As long as the bull market remains intact, this alternative investment management giant will remain in our portfolio. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, bounced back nicely after a down week and is back close to its late-April highs. In his latest update, Tom wrote, “The stellar performing chip and software infrastructure company stock has leveled off since late February. That behavior is consistent with past performance of the stock since it’s been in the portfolio (and returned 216%). It tends to level off after a big surge, as it did this past June through October before its next surge higher. Earnings could be a catalyst to get the stock moving again but it doesn’t report for another month. Things look good as several technology giants reported increased spending on AI-related products and services in their earnings reports, which should benefit Broadcom.” BUY

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, added another 4% this week and has been on a tear for nearly a month; our timing on this one is looking close to perfect. The recent positive action prompted Mike to add more shares in Cabot Growth Investor, as he noted in his latest update: “Cava (CAVA) is very volatile, but remains very strong, actually hitting higher highs both early last week and early this week. Earnings are coming up on May 28, less than three weeks away, which is obviously a risk, but seeing as how we only have a half position here, we’re going to add a few more shares.” BUY

Core & Main (CNM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, held firm at 59 after making a strong move up from 54 the previous few weeks. It’s an infrastructure play, and while the story isn’t sexy (Core & Main is one of two nationwide distributors of pipes, valves and fittings, storm drainage and fire protection products as well as water meters), it’s solid and reliable as the U.S. pours money into improving its decaying infrastructure. A break above 60 (i.e., new turf) would be quite bullish. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, took a breather this week after a big push since its mid-April bottom. In his latest update, Mike wrote, “CrowdStrike (CRWD) has rebounded decently since the market low and is now challenging its 50-day line from below—all normal action thus far, though like most names, it’s now battling resistance. Interestingly, a peer (Zscaler) just announced it may have been hacked, which is a bad look, but in this case it could drive even more business toward CrowdStrike. The company has announced a slew of new/upgraded offerings, including some that can be added on to products from big players (like one from Microsoft), but earnings here aren’t out until June 4 (the firm’s quarter didn’t end until April 30), which will be what counts. In the meantime, our thoughts haven’t changed—CRWD seems to be building a normal launching pad for now, so we’ll continue to sit tight.” We will too. HOLD

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, keeps bouncing around in the 41-44 range in the wake of earnings. In his latest update, Mike wrote, “DraftKings (DKNG) released a great Q1 last Thursday evening, with revenue up a strong 53%, driven about equally by new customers (3.4 million in the quarter, up 23%) and revenue per customer ($114 per customer, up 25%), while costs (including customer acquisition costs) remained contained, all of which prompted management to up their 2024 outlook. Indeed, the firm now sees about $400 million in free cash flow this year (north of 80 cents per share) and $500 million in EBITDA, compared to a $150 million EBITDA loss last year. The stock, though, looks like a lot of earnings plays this season—it initially gapped up before reversing hard, though it’s held up since then. Net-net, not much has changed, with DraftKings’ business looking great, but the stock is still fighting to come out of its correction.” BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is down marginally since we last wrote, though is still up nicely since reporting yet another strong quarter earlier this month. As Tom noted, “Although the company missed slightly on revenues, earnings per share were much better than expected and, even more importantly, Lilly significantly raised guidance for this year. The main reason is that its weight loss drug revenues obliterated forecasts with $517.4 million in revenue for the quarter versus an expected $373 billion. The company is also aggressively expanding production for future quarters and raised its 2024 revenue projections by $2 billion. The weight loss drug is a monster and looks like a mega blockbuster and the Alzheimer’s drug should get the nod in the next few months.” BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, had a good first week in our portfolio, rising 5% as part of an ongoing post-earnings bump. In fact, the stock has soared 88% since the start of November, getting a boost from the bull market run but also gaining strength from the March launch of its new AI product, “Airo.” GoDaddy has long been a leading website hosting service, but the Airo will, as Tyler wrote in this space last week, help “customers, including a lot of entrepreneurs and solo creators, get their websites up and running faster. One of the challenges to this group is that they have an idea or concept for a business but get stumped when trying to implement it.

“Specifically for the solo creators, Airo supposedly helps a ton in the creative process. It can help choose a domain name, select a website template and create the site, write text, synch marketing schedules across social media platforms and create social media captions.

“Help overcoming these barriers is potentially huge. And while it’s early days, Airo seems to be helping.

“On last week’s Q1 earnings call (results were slightly better than expected) management said Airo, which began to roll out to new customers in April, is showing high website attach rates.

“The product will roll out to existing customers soon, and then internationally. Management talked at length about how the company is using data to better understand how to charge customers for all the features Airo offers and how early results show more customers opting for a website when offered Airo.”

Revenue is expected to grow 6.5% this year and 7% next year, but those numbers could be conservative depending on how big a piece Airo becomes. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, held firm as the cannabis industry awaits the Drug Enforcement Administration’s (imminent?) ruling on whether to reschedule marijuana from a Class I to a Class III drug. Meanwhile, as Michael wrote last week, “Green Thumb on April 24 announced it is opening a RISE Dispensary in Wesley Chapel, Florida. This is the company’s 16th retail location in Florida and 93rd nationwide. The store will offer popular Green Thumb brands like RYTHM premium flower, Dogwalkers pre-rolls, Good Green flower and &Shine flower, pre-rolls, vapes and chews.” BUY

Honda Motor Co. (HMC), originally recommended by yours truly in the Growth & Income Portfolio of Cabot Value Investor, reported another strong, hybrid-growth-fueled quarter last Thursday, but so far the stock doesn’t have much to show for it – a common theme this earnings season. Thanks in part to a weak yen, the Japanese automaker saw a 77% increase in its operating profits in the most recent quarter, on a 21% improvement in sales. Hybrid sales were the real star, helping Honda sell 3 million cars globally, up from 2.3 million in the same quarter a year ago. “Hybrids are our weapon,” CEO Toshihiro Mibe said. So the company is leaning into deploying its new “weapon,” with plans to produce 2 million hybrids by 2030; an $11 billion investment in a new EV and EV battery plant in Canada should help both with hybrids and electric vehicles – an area in which Honda continues to lag behind other major automakers (the Honda Prologue is the only fully electric vehicle it sells in the U.S.). Meanwhile, the company is using its excess profits to ramp up stock buybacks. Add it all up, and there’s a lot to be encouraged about, and investors will soon catch on, even if they haven’t done so in the three trading days since the report. BUY

International Business Machines (IBM), originally recommended by Carl Delfeld in Cabot Explorer, hasn’t gotten much of a bounce since an earnings implosion late last month. The 1.5% revenue growth was uninspiring, and investors have been reluctant to buy IBM since it got knocked back from 184 to 164. Two weeks later, the stock is merely back to 167 and is trading well below its 50-day moving average. Let’s part ways with IBM. The stock simply hasn’t performed since we added it to the portfolio six weeks ago, and while it may have simply been bad timing on our part, the 1.5% revenue growth isn’t inspiring a ton of confidence going forward. Moving to sell. MOVE FROM HOLD TO SELL

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, held firm at 381 after a nice recovery from 366 in mid-April. There’s been no news. But the maker of the da Vinci robotic surgical system is coming off a strong earnings report in late April and received approval for its new da Vinci 5 system in March. Though full-scale launch won’t come until possibly next year, it’s a potential game changer for the company, and investors have taken notice, pushing ISRG shares up 37% in the last six months. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, got knocked back from 50 to 49 on perfectly fine earnings. Net investment income of $1.05 per share topped analyst estimates of $1.03 and marked a 9% improvement from the first quarter a year ago. Net asset value improved 1.2% quarter over quarter and has now risen for seven straight quarters. So the numbers were solid for this business development company (BDC), but didn’t pack enough “wow” to add to a share price that was already up nearly 20% year to date prior to the report. Good results were already priced in, so it’s getting knocked back a bit now. But it’s nothing to be concerned about. Chances are, the dip will be temporary. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, held steady after a sharp up-and-down over the previous month. Its position as one of THE artificial intelligence leaders was further enhanced today as it announced a $4.3 billion investment in France intended to help improve the country’s blossoming AI sector – part of President Emmanuel Macron’s “Choose France” initiative. Led by its ever-expanding AI segment, Microsoft has found new life and should be part of any long-term portfolio. BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, is back with a vengeance after a deep but brief April retreat, adding back roughly 11% this month alone. There was no major news, although the streaming giant will present at the annual “Upfronts” in New York City this Thursday, May 16. The company is coming off another impressive quarter in which revenue grew 15.2% to $9.4 billion (beating by 1.3%, or $125.2 million) while EPS grew 83.3% to $5.28 (beating by 16.7%, or $0.76). Net streaming additions were 9.3 million, way ahead of expectations. The one caveat was that full-year guidance came in a bit light, and the company said it would stop sharing subscriber numbers, drawing suspicion. Still, Netflix’s position as the dominant streamer is clearer than ever, and the stock still trades $100 per share below its late-2021 peak. There’s plenty more upside here. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, appears to be breaking out of its six-week range between 122 and 129 today, though we’ll see how it closes. In his latest update, Carl noted, “The company announced it was reducing prices for its products in Denmark by roughly a third and announcements from Amgen and Pfizer that they are seeking to enter the anti-obesity market. Goldman Sachs projects the market for obesity medications could grow to $100 billion in the next decade so there is room for more entrants, but Novo needs to maintain its leadership position.” BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is in full-on recovery mode, tacking on another point this week. In his latest update, Mike wrote, “Nutanix (NTNX) acted pretty solidly during the growth stock decline, and once again that subtle relative strength was a clue—shares have had a nice few days, rallying to new price and relative performance (RP) highs, albeit on light volume. One analyst just upgraded shares, citing something we’ve written about a few times—Nutanix looks likely to take share from VMware after Broadcom bought them (and proceeded to mess with things, bundling offerings and raising prices), possibly up to a couple hundred million dollars’ worth, though it’s likely to play out over many years given how much of a pain it is to switch providers. The real key will be May 29, when the quarterly report will be released; in the meantime, we’ll stick with our Buy rating.” So will we. BUY

PayPal (PYPL), originally recommended by Carl Delfeld in his Cabot Explorer advisory, keeps chopping around, hitting as high as 68 at the end of April after dipping as low as 62 in mid-April. Now it’s on the downslope again, falling below 63 last week before getting a nice bump today. I’m starting to run out of patience with this stock, which we added to the portfolio three months ago. Trading right at its 50-day line, let’s hang on for now, hoping for another bounce-back. The company is coming off a solid first quarter in which it reported earnings of $1.08 per share, which improved 27% on a year-over-year basis. But last week, Carl downgraded it to Hold, citing increased competition in the digital payments space from the likes of Apple, Google, and Alphabet while fintech companies such as Ayden and Block compete as well. We’ll see how that affects the stock price in the coming weeks. MOVE FROM BUY TO HOLD

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, has recovered quite nicely from its early-April swoon, including a nice boost from earnings. As Mike wrote last week, “It’s hard not to be encouraged by the action in PulteGroup (PHM), which found support where it ‘should’ (mid-100s), reacted well to earnings and quickly returned to its prior highs before backing off a bit. Obviously, interest rates are very news-driven (next week’s CPI report will be closely watched), and if they spike after their recent tumble, PHM could slip. But we’ll restore our Buy rating here, thinking the longer-term uptrend is reasserting itself as investors focus on the underlying business trends.” We’ve kept PHM a Buy in our portfolio all along; if you haven’t already bought, you can do so now, but I’d keep positions small prior to this Wednesday’s CPI report. BUY

Qualcomm, Inc. (QCOM), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was up from 181 to 184 this week after a huge earnings gap from 164 the week before. The stock is trading at new 52-week highs. Tom detailed the earnings in his latest update: “The mobile device chip king reported earnings last week that beat estimates and the company raised earnings guidance for 2024. The market was thrilled and QCOM has risen 12% since the report to a brand new 52-week high. The earnings growth was expected as a still somewhat weak smartphone market is getting better. But the enthusiasm is mostly about the rapid approach of AI-generated smartphones and PCs. One analyst contends that an AI-driven iPhone supercycle is coming next year. Qualcomm is at the leading edge of chips that enable AI for smartphones and PCs and should benefit mightily if such a cycle comes to fruition.” We now have a 23% gain on the stock (not including the dividend payment!) in just three months. BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, continued its steady ascent and keeps ping-ponging between 64 and 66 ahead of the company’s earnings report tomorrow, May 14. Expectations are mixed – earnings per share in the red (-$0.02), down from $0.15 per share last year; revenues are expected to grow by 17.2%. The Singapore-based tech conglomerate is coming off a year in which it generated a record $13 billion in total revenues. We’ll see if it can keep adding to that. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is back to its comfort zone in the low 170s after closing April at 194. It’s better than the lows near 140 prior to Elon Musk’s stealth trip to China to convince the Chinese government to allow its autonomous driving technologies in Chinese Teslas. But the huge bump it got from that news event wasn’t a lasting game changer for the share price, it appears. So, we’ll keep the stock at Hold until it gets a more lasting bump, which will likely have to come from signs of improvement in its sales after three consecutive disappointing quarters amidst a larger slowdown in EV sales. HOLD

Tripadvisor (TRIP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, imploded on earnings, falling from 25 to 18 in the blink of an eye. What went wrong? Not much, at least on the surface. Non-GAAP EPS of 12 cents a share more than doubled the 5 cents a share the online travel agency booked in the first quarter a year ago, while revenues improved 6%. What investors didn’t like, however, was the operating loss ($15 million, up from $14 million in Q1 last year), and revenues among Tripadvisor-branded hotels came in light at $159 million, down 5% year over year. Still, those seem like petty reasons for TRIP to get sold off to the tune of 29% in a matter of hours, so I foresee a bounce-back coming. Since our loss is quite modest (we had a 31% gain on the stock prior to the report), we can afford to hang in here. As long as the stock holds support above 18 – which it has done since it cratered last Wednesday – let’s hang in there. Keeping at Buy for now, but a dip into the 17s would likely have us move to Hold, or worse. BUY

Uber Technologies (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, is having a rough stretch, falling from 81 to 65 since the beginning of March. And last Wednesday’s earnings didn’t help matters, as Mike detailed: “Uber (UBER) reported a good-not-great Q1 yesterday that was a bit confusing. Just looking at the report, sales were up 15%, but that undershot the ‘real’ results as some business model changes hacked off about seven percentage points from the top line’s growth. Meanwhile, EBITDA was up 82% and free cash flow was huge (north of 60 cents per share). However, the Q2 outlook was below expectations, though again there were some moving parts, including a good-sized hit from expected currency movements. Bottom line, the story is very much intact, especially when it comes to earnings and free cash flow, but the stock needs to hold up around here—UBER got whacked after the report, though it did find some support late yesterday and again today. We’re holding our remaining position, but would expect buyers to show up if all’s well.” HOLD

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 May 20, 2024.

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