Cabot Stock of the Week Issue: May 30, 2023

Deal or no deal? It seems like the former, but as we’ve learned from the current dysfunction in Congress and last weekend’s Succession finale, until the votes are actually counted, you don’t know for sure. Thus, the debt ceiling remains in limbo, at least for a few more hours. It’s why stocks have barely budged after the long weekend, which included an apparent handshake agreement between Kevin McCarthy and President Biden; until they see it in writing, Wall Street doesn’t quite trust it – aside from the well-financed folks who are snatching up artificial intelligence stocks like they’re turn-of-the-century Teletubbies.

So, we maintain a relatively cautious stance, even though a debt deal seems more likely than not at this point. If it does finally get done, though, the Federal Reserve and interest rates will likely retake center stage, as investors now believe there’s a better than 50% chance the Fed will raise rates by another 25 basis points next month after the latest personal consumption expenditures (PCE) price index came in slightly hotter than expected. We’ll see. It’s exhausting, this market being so tethered to the news cycle. You’re better off ignoring the news and focusing on stocks that have good stories, numbers and charts, like always.

Today’s addition has all three. It’s a small-cap medical technology company recently recommended by Tyler Laundon in his Cabot Early Opportunities advisory. Here are Tyler’s latest thoughts on it.

Si-Bone (SIBN)

There are around 30 million people in the U.S. suffering from chronic back pain.

In 15% to 30% of these cases, the root cause is sacroiliac joint (SI) dysfunction. It can lead to constant or intermittent pain in the lower back, buttocks, pelvis, groin and/or legs. It can also cause numbness, weakness and/or tingling in these areas.

To nail down SI dysfunction as a source of lower back pain patients need diagnostic imaging (X-ray, CAT scan, MRI), a diagnostic injection of the SI joint (local anesthetic to see if pain is reduced by over 50%) and/or a series of provocative Si joint tests (doctor manipulates joints to determine if SI joint is cause of pain).

Once the SI joint is determined to be the issue, the next step is to figure out how to fix it.

Enter Si-Bone (SIBN), a small-cap company specializing in implants that solve issues of the SI joint and pelvis.

The company has developed minimally invasive, titanium surgical implant systems (triangle-shaped implants, screws, etc.) to address SI dysfunction and other unmet clinical needs in pelvic fusion, fixation and management of pelvic fractures. It has also developed instruments to help place implants during surgery.

Si-Bone’s first product (2009) was the first generation iFuse Implant System to fuse the SI joint and treat SI joint dysfunction.

It has since launched three new FDA-approved product lines, including the iFuse-3D implant (2017) for pelvic trauma, iFuse-TORQ threaded implant (2021) for adult spinal deformity and the iFuse Bedrock Granite threaded implant (2022) for sacroiliac fusion and sacropelvic fixation.

Altogether these three markets are worth around $3.7 billion, assuming 470,000 annual procedures in the U.S. Less than 10% of revenue comes from international markets.

There are over 100 published papers on the benefits of Si-Bone’s technology, all of which has helped the company expand coverage to over 300 million people in the U.S. So far, over 80,000 procedures have been completed by more than 3,000 surgeons.

The company used some of the downtime during the pandemic to develop new solutions (TORQ and Bedrock Granite), build clinical evidence and get the word out to surgeons.

Those investments appear to be bearing fruit now and have paved the way for Si-Bone to go deeper into the pelvic trauma and adult deformity/degeneration markets.

The first quarter of 2023 was impressive. Revenue jumped 46% to $32.7 million, beating by $3.6 million. EPS of -$0.41 improved by 24%.

The company had 950 active surgeons (+40%) in the U.S. and 3,500 procedures in the quarter (+48%).

Management increased full-year 2023 guidance by the amount of the Q1 beat, to a range of $128 - $131 million (+20% to 23%). That implies there’s room to outperform in the last nine months of the year.

Coming out of the quarter, Si-Bone has great momentum due to rising procedure volumes, a larger product portfolio and expanding use of certain products for procedures that they weren’t necessarily expected to be used for.

The company is also better funded now than it was just a few weeks ago, thanks to a roughly $70 million secondary offering (priced at 22) that was announced shortly after the Q1 earnings report. I expect this capital will help the company expand its sales and R&D investments.

SIBN came public at 15, peaked at 37 during the pandemic then bottomed at 11.2 a few weeks after the Q3 2022 earnings report last November. It kicked around in the 11s for a bit then jumped above its 200-day line (near 15.8 at the time) in the beginning of January and hasn’t looked back since.

Shares were trading near 22 just before the Q1 2023 earnings report on May 1, then rallied to an intra-day high of 27.2 the next day. A secondary offering priced at 22 right after the event pulled SIBN down to the offering level. The stock rallied to new closing highs two weeks ago then dipped back near its 20-day moving average line to close last week around 24.

Current Recommendations

Changes Since Last Week:
Tesla (TSLA) Moves from Hold to Buy
Ulta Beauty (ULTA) Moves from Buy to Sell
Visa (V) Moves from Buy to Hold

We have another subtraction this week, as very-recent portfolio darling Ulta Beauty (ULTA) has come under heavy fire after an ominous earnings report last week warned of slowing revenue and cut guidance in the months ahead. We’ll step aside from ULTA before our gains in the beauty retailer completely erode. Several of our other stocks, however, keep hitting new highs, including Microsoft (MSFT), which is getting a huge boost from its position as a leader in artificial intelligence innovation. Tesla (TSLA) is another mega-cap name in our portfolio that’s recovering nicely, so we’re bumping it back up to Buy. Visa (V), on the other hand, has weakened, warranting a downgrade.

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

Updates

Brookfield Infrastructure Corporation (BIPC), originally recommended by Tom Hutchinson in Cabot Income Advisor, was down a point in its first week in the portfolio. Still, the stock remains in the same 46-47 range it’s been in for the last few weeks. In his latest update, Tom wrote, “The infrastructure company is up over 12% this month while the market has been flat over the same period. The stock probably got new life after a sluggish period because Brookfield reported a solid earnings quarter with funds from operations (FFOs) per share growth of 12.5% over last year’s quarter. The company benefited from recent expansions and acquisitions but also showed solid organic growth. Brookfield is a solid holding amid inflation and/or recession.” BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, gave back nearly all of its May gains last week after Chinese electric vehicle rival Xpeng reported a 45% decline in first-quarter sales and projected a shortfall in second-quarter deliveries. Ironically, BYD may have had something to do with Xpeng’s poor performance, as the company tripled its sales (to 1.85 million cars) in 2022 and reported another 80% improvement in the first quarter, with 410% EPS growth. It appears BYD is putting some distance between itself and China’s other EV makers and is, in essence, becoming the Tesla of China. So, it’s still very much a Buy even after a down week. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, has retreated about 5% from its early-May peak above 41. But the stock is still up more than 12% year to date and trading well above its moving averages. In his latest update, Bruce wrote, “Chair/CEO Brian Roberts said that the company is likely to sell its 33% stake in Hulu to Disney next year, rather than buy Disney’s 67% stake. The final valuation is subject to negotiation but would likely generate at least $6 billion of after-tax proceeds to Comcast, based on a $27 billion valuation for all of Hulu.

“Comcast shares … remain just below our 42 price target. Given the company’s revenue and profit resilience, plus the possibility that it sells its Hulu stake and uses the cash proceeds to repurchase shares, we are raising our price target to 46 and returning them to a BUY.”

We’ve had CMCSA on Buy all along, and the fact that Bruce has enough faith in the stock to upgrade both his rating and the price target is validation of our confidence in the media giant. We still like it, and this latest dip looks buyable. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, has pulled back in an orderly fashion since hitting new all-time highs above 440 earlier this month. Now it’s holding support in the 423-425 range. In his latest update, Tom wrote, “LLY continues to blow away the market. It recently made another new all-time high. The stock got a huge bump after earnings when the company reported very promising results from its obesity drug tirzepatide. The following week, Lilly reported promising trial results for its Alzheimer’s drug, another potential blockbuster that could be approved within the year.

“LLY is up 38% since I upgraded the stock to BUY in early March. I do like this stock longer term. But it tends to pull back after a big surge. In a better market, I might be patient with that since the longer-term trajectory is probably higher. But good returns are hard to come by in this flat market and I want to preserve the recent gain. A higher level of trading is necessary to boost returns in a stingy market. I do fully intend to buy back these shares later. SELL HALF.”

Should we do the same? We added LLY to Stock of the Week later than Tom, on March 21, so our gains are a bit smaller. If you bought on our recommendation then and want to shed a few shares to book profits, it’s not the worst idea. But officially, I will keep the stock at Buy, and see how it behaves after holding support for the last week. BUY

Green Thumb Industries (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, had a good week, tacking on about 6%. The stock is still well shy of its apex in the mid-8s from just three weeks ago, but it has bounced nicely in the last 10 days. There was no news, for the company or the cannabis sector. Keeping at Buy. BUY

Kimberly-Clark de México (KCDMY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has fallen sharply this month and is down about 10% from its highs. Carl actually decided to sell the stock last week, saying he was “concerned about the lack of trading liquidity coupled with very little in terms of new information about the stock and company.” All of that is true, but not out of the ordinary for the Mexican version of a century-old paper company (Kimberly-Clark). We still like Carl’s premise that this is a play on Mexico’s 25% manufacturing discount compared to China and the U.S. Plus, the stock is still up 21% year to date and appears to have put in a bottom at 10 even. As long as it holds above that support level, we’ll give it more time. BUY

Las Vegas Sands (LVS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is back down to where it was six weeks ago, at 55, after hitting highs close to 65 at the beginning of May. There was no news - indeed, the story hasn’t changed for the worse in regard to the casino sector or China’s reopening - and we still have a decent gain, so if you don’t own the stock already, you can nibble on the latest dip. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, keeps tacking on points to hit new 52-week highs! In fact, it’s fast approaching its November 2021 all-time high (343) thanks to its leadership position in the red-hot artificial intelligence boom, with ChatGPT and Bing. Nvidia’s (NVDA) monster AI-fueled quarter surely had something to do with MSFT’s latest run-up, further whetting investor appetite for all things AI – one of the very few true growth sectors at the moment, along with semiconductors. With a 30% gain in less than three months, it wouldn’t be a bad time to take some shares off the table. But considering how scorching artificial intelligence remains, we’ll keep MSFT at Buy, even at 18-month highs. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is re-testing its May lows around 160. A break below it could have us reconsidering our rating, but for now it remains a Buy because, as Carl wrote last week, “sales of its obesity medications Wegovy and Ozempic are rising sharply, and the company expects $40 billion of revenue in 2024 across its drugs for diabetes, obesity, rare diseases, and cardiovascular disease but new competitors are emerging.” BUY

Spotify (SPOT), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, was mostly unchanged this week after a nice run-up the week before. There was no news. As Mike wrote in this space a couple weeks ago, “Spotify still has great potential—it’s the leading music streaming platform out there, with around one-third of the market, and it’s made huge gains in podcasts as well (they’re paying Joe Rogan a boatload to be on their platform, though there are dozens others to listen to as well). Thus, while costs were high (including acquisitions—it made four small ones last year), the firm has grown nicely, with subscribers nearly tripling during the past few years even as the stock has struggled. And the big idea here is that, with the business a bit more mature, management is focused on cash flow, and that has the stock in a turnaround phase.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has had a very good May. Since dipping to multi-month lows at 153 in late April, the stock is up 30% to touch 200 for the first time since March. Elon Musk’s first visit to China in three years is the latest catalyst. He’s expected to make a cameo at the company’s Shanghai Gigafactory but will also meet with Chinese officials for some glad-handing and to help maintain Tesla’s standing in the world’s biggest EV market, where competition is increasing exponentially (see BYD, above). Now trading above its 50-day moving average and in line with its 200-day average for the first time all year, let’s bump TSLA back to Buy based on recent momentum. MOVE FROM HOLD TO BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, remains in the 37-39 range it’s been in all month since a huge gap up from 29 in late April and early May. Eventually, a breakout will come. We’ll keep it at Buy until it does. BUY

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, went from tailspin to freefall after the company’s earnings report last week underwhelmed. The beauty retailer cut its full-year operating margin guidance and said that its recent growth is starting to moderate. Though both earnings and revenues slightly beat estimates, the guidance was ominous enough to send shared spiraling 13.4% on Friday – making ULTA the worst-performing stock on the S&P 500 that day. We’ve seen enough – it’s time to throw in the towel before our once big gain turns into a loss. In the aggregate, ULTA has been good to us, rising more than 7% in the year since we (Tim) recommended it last May, outpacing the 1.3% decline in the S&P 500 during that time. But it’s suddenly fallen on hard times, so let’s say goodbye before those times get any harder. MOVE FROM BUY TO SELL

UnitedHealth Group (UNH), originally recommended by Tom Hutchinson in Cabot Dividend Investor, keeps holding in the neighborhood of 480. 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, broke to the downside of its recent range, hitting two-month lows in the low 220s. There was no news. In his latest update, Tom commented on the company’s recent earnings report, which offers some hope: “The payments processing company grew earnings per share by 17% and revenues grew double digits versus last year’s quarter. That’s terrific when the average stock is posting lower earnings. Plus, it can really take off when the market recovers for good. This is a great stock in an up market. The resilience in this market is encouraging and makes the stock easy to hold.” We’ll downgrade it to Hold as well. MOVE FROM BUY TO HOLD

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, keeps holding steady after a big earnings gap in early May. In his latest update, Mike wrote, “Wingstop (WING) has made good progress for us over time, but there have been plenty of fits and starts and right now the stock is in the midst of a three-plus-week retreat—so far, it’s been mild, with shares still a few points above the 50-day line (near 193 and rising), but we’re keeping our eyes open just in case. Interestingly, while many growth-oriented retail-related names have hit the skids, a few restaurants are still looking good, including institutional favorite Chipotle (CMG), which we take as a small plus. All in all, we’re OK holding WING here, giving it some (but not unlimited) rope as it digests its prior upmove.” We’ll keep it at Buy. 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, has broken down, falling from 33 to 26 this month, with most of the selling coming after earnings in early May. The earnings weren’t bad at all, with revenues up 40% and EPS losses narrowing to almost nothing (-$0.02). Management said they see full-year 2023 revenue higher than previously expected, in a range of $295 - $300 million (+20%), which straddles consensus of $295 million. They also see net new studio openings in the range of 540 to 560 (+8% over 2022). Adjusted EBITDA, a measure of profitability, is seen up 40% to a range of $102- $106 million. So, the growth story with this leader in the boutique fitness studio and fitness brand space remains very much intact. But the stock has come back to Earth after soaring since last summer. I advised selling a few shares at the top in April given that our return was north of 80% at that point, and last week we downgraded to Hold. I’ll keep it right there, with the hopes that the bounce in the last couple days is the start of a more extended rebound. HOLD

The next Cabot Stock of the Week issue will be published on June 5, 2023.