Stocks are down since our last issue, but not by much, and they’ve largely been in the same range since the start of April. There are more big-news items on the docket this week (the April Consumer Price Index report on Wednesday, the Producer Price Index on Thursday) that could potentially sway the market in one direction or another. But for now, things feel relatively calm – a feeling that’s supported by the Volatility Index (VIX), which has posted modest readings (16-20 range) since late March.
One sector that’s almost always volatile – and has been in the doldrums for a solid two years now – is cannabis. But last week, for the first time in a while, it sprung to life, with cannabis stocks jumping more than 8%. We’ve been waiting to see any sign of life from the cannabis sector before adding a new recommendation from our Cabot Cannabis Investor advisory, run by industry veteran Michael Brush. Now we have one.
So today, we add one of Michael’s top recommendations – a stock that was a Stock of the Week holding until the sector cratered again a few months ago. Second time’s the charm? Here’s Michael…
Green Thumb Industries (GTBIF)
Shares of our Green Thumb Industries (GTBIF) advanced over 25% after it posted quarterly earnings on May 3 after the close.
This cannabis sector leader posted only mediocre results – with a few bright spots if you dig into the details (which we will get to below).
So, why the big move? Potentially huge sector developments, naturally. Late last week we learned that Congress is getting serious again about clearing the way for banks to serve cannabis companies that have fully legal operations under state law.
This reform is sorely needed to de-risk dispensaries which currently can only take cash in sales. Their cash-only nature puts a target on them for hold-ups, which seems unfair to employees to say the least. But this reform could also pave the way for progress on other big-picture policy reforms that could boost the sector – like the chance for cannabis companies to list their stocks on the big exchanges. That could attract much-needed institutional interest in the space.
But we’re getting ahead of ourselves, with this speculation. Near-term, the big development was news that the Senate banking committee will hold hearings on May 11 on so-called “SAFE banking.”
That stands for a reform bill known formally as the Secure and Fair Enforcement (SAFE) Banking Act – which would allow banks to offer services to cannabis companies. This would give sector companies better access to funding and also the use of credit cards in stores – without risk of a crackdown by federal regulators. Cannabis is still illegal at the federal level.
Attempts to pass this bill have failed several times in the past. This time around, the odds seem at least reasonable that approval may happen, given that lawmakers on both sides of the aisle have introduced versions of SAFE banking in both the Senate and the House. A big risk is that lawmakers will try to weigh the reform bill down with irrelevant banking law reform, and so-called “social equity provisions” that clear the way for contentious changes like expungement of criminal records for cannabis law violations.
As for the Green Thumb quarter, the company reported what seems like mediocre revenue gains of 2.4% to $248.5 million. That’s not as ho-hum as it seems, though, given that the fourth quarter can be seasonally weak, and the sector has been bogged down by 30% year-over-year price declines for cannabis at the wholesale level.
Looking under the hood, Green Thumb shared some encouraging news, as well, though. Same-store sales at retail outlets open for more than a year increased 6.3% versus the prior year on a base of 73 stores. In retail, the metric same-store sales is a telling indicator because it strips out the impact of store openings and closings. The same-store sales growth confirms the strength of Green Thumb’s Rise dispensaries, and its branded cannabis products like &Shine, Beboe, Dogwalkers, Doctor Solomon’s, Good Green, incredibles and RYTHM.
Green Thumb also posted operating cash flow of $75 million for the quarter and $185 million in cash. At a time when the sector remains wobbly because of negative pricing trends, cash strength is important for two reasons. First, it suggests a company will be a winner in the current cannabis Hunger Games. Second, cash-rich companies have the power to build strength with opportunistic acquisitions or store openings to take share.
Chicago-based Green Thumb is the biggest position on the Cannabis SX Advisor. Green Thumb was the third-largest cannabis company in the U.S. last year, with operations in 15 markets. It has been the most profitable multi-state operator of all the big ones – a sign of good management. Green Thumb is expanding its medical footprint in Florida through a lease agreement with the convenience store chain Circle K. This could be a big deal since the Circle K chain has 600 locations in Florida. Ongoing market developments in Illinois and New Jersey could be strong catalysts for Green Thumb Industries. Founder Ben Kovler is chairman and CEO. Research shows that founder-run companies often outperform. Kovler has a 26% stake in the business and holds nearly 59% of voting power.
The bottom line: It would be foolish to make a big bet on cannabis because of the potential for banking reform in Congress. Politicians are too unpredictable. However, the current revival of reform prospects confirms the bullish long-term trends in cannabis because of public support for legalization demonstrated by polls. If you are going to bet on cannabis for the long term, industry leader Green Thumb is a good way to go.
|GTBIF||Revenue and Earnings|
|Forward P/E: 19.6||Qtrly Rev||Qtrly Rev Growth||Qtrly EPS||Qtrly EPS Growth|
|Trailing P/E: 140||(mil)||(vs yr-ago-qtr)||($)||(vs yr-ago-qtr)|
|Profit Margin (latest qtr) 0.00%||Latest quarter||249||2%||0.04||-67%|
|Debt Ratio: N/A||One quarter ago||259||6%||0.05||-50%|
|Dividend: N/A||Two quarters ago||261||12%||0.04||-50%|
|Dividend Yield: N/A||Three quarters ago||254||15%||0.10||0%|Current Recommendations
Price on 5/8/23
BYD Company Limited (BYDDY)
Cisco Systems Inc. (CSCO)
Comcast Corporation (CMCSA)
Gates Industrial Corporation plc (GTES)
Green Thumb Industries Inc. (GTBIF)
Kimberly-Clark de Mexico (KCDMY)
Las Vegas Sands (LVS)
Eli Lilly and Company (LLY)
Novo Nordisk (NVO)
Sensata Technologies Holding plc (ST)
Uber Technologies, Inc. (UBER)
Ulta Beauty (ULTA)
UnitedHealth Group Inc. (UNH)
WisdomTree Emerging Markets High Dividend Fund (DEM)
Xponential Fitness, Inc. (XPOF)
Changes Since Last Week:
Cisco Systems (CSCO) Moves from BUY to SELL
Sensata Technologies (ST) Moves from BUY to HOLD
Last week we reached our 20-stock cap, so something had to go this week. Cisco Systems (CSCO) is the “victim,” although it’s hitting new lows and hadn’t done much for us since we added the stock late last year, so this was an easy decision. Fellow value stock Sensata Technologies (ST) is also near the chopping block after falling the last few weeks, but we merely downgraded it to Hold since the company is coming off a strong quarter – perhaps investors will eventually realize it and wake up the shares.
Other than those two, most of our stocks are acting well, which means we may have to make a harder decision next week with the portfolio still capped at 20 with today’s addition of GTBIF. But that’s for next week. Here’s what’s happening with all our stocks right now.
BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, held firm at 60 this week. The only real news was that the Chinese electric vehicle giant plans to open a manufacturing plant in Vietnam as the company continues its relatively nascent global expansion. BYD is already growing like crazy, coming off a quarter in which it sold a record 552,076 electric vehicles – a 92.8% year-over-year increase. It also recently launched an $11,300 EV called the Seagull. BUY
Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor, dipped to new 2023 lows this past week, and it’s time for the stock to go. It simply hasn’t made any headway since we added it to the portfolio in December, and now it’s dangerously close to falling below its 200-day moving average. We had to say goodbye to one stock this week, and this looks like the “best” candidate. MOVE FROM BUY TO SELL
Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor, pulled back normally after a huge earnings gap the week before. In his latest update, Bruce wrote, “Comcast reported a strong quarter, with adjusted earnings of $0.92/share increasing 7% from a year ago and beating the $0.82 consensus estimate by about 12%. Revenues fell 4% although the year-ago results included the Beijing Olympics and the Super Bowl. Revenues were incrementally ahead of estimates. Free cash flow was robust at $3.8 billion even though it was 20% below year-ago results. All-in, another quarter of stable results with good execution.
“We see the revenue decline due to the Olympics and the Super Bowl as reasonable. The Olympics are not held every year, of course. The Super Bowl broadcast rotates annually among three broadcasters (CBS, Fox, NBC) with ABC joining the rotation in 2024 but not broadcasting the game until the February 2027 Super Bowl.
“Total customer relationships in the Connectivity & Platforms segment rose incrementally, but the domestic video customer count fell 12%, reflecting the secular shift away from cable television. However, segment revenues were flat while profits increased 4%, helped by higher pricing.
“Strong demand drove Theme Parks revenues up 25% and profits up 46%, while Studios profits increased 13%. The strong early-April release of the new Super Mario Brothers movie, which has already generated $1 billion in revenues, is providing a strong start to the second quarter.
“Despite the decline in revenues, cost-cutting helped drive EBITDA to a 3% year-over-year increase. The Peacock streaming service produced a large $(704) million loss, worse than the year-ago $(456) million loss, but revenues rose 45% and the subscriber count increased to 22 million. These traits suggest that customers are willing to pay for the service, but that it needs to eventually find a way to become profitable.
“Capital spending remains elevated, up 44% from a year ago, as the company spends to maintain and upgrade its cable and telecom infrastructure and build the Epic Universe theme park in Orlando.
“Comcast’s share count continues to decline, down 1% from the fourth quarter and down 7% from a year ago, even as the balance sheet remains sturdy.
“This past week … Hollywood writers (went) on strike. We have no insight into when an agreement will be reached. We would like to see a quick and fair resolution – following a protracted strike years ago, the quality of movies that were subsequently released were stark reminders of the skill that these writers bring. We would not like to see anything impair the strong appeal of (revenue-producing) streaming content or the rebound in demand at movie theaters.” BUY
Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, continued its relentless ascent to new heights! The stock has reached a fresh all-time peak of 433 as of this morning – 7% higher than when we last wrote, up 18.5% year to date, and up a whopping 30% in the six weeks since we recommended it. In his latest update, Tom wrote, “LLY continues to be on fire. It just hit a new all-time high in a bear market. The stock is up about 27% since it was upgraded to a buy in early March. After moving to a new high, LLY got another spike from earnings last week. Earnings slightly beat estimates and the company did raise guidance for the year. But the main catalyst was the reporting of very promising results from its obesity drug tirzepatide. Obesity is a massive problem, and this drug shows far more promise than any other drug out there. This report greatly increases the chances that this potential mega-blockbuster drug will be approved.” BUY
Gates Industrial Corp. (GTES), originally recommended by Bruce Kaser in the Buy Low Opportunities Portfolio of his Cabot Value Investor, got a nice boost from earnings this past week, rising 4%, despite falling short of both revenue and earnings estimates. Revenues reached $897.7 million, up slightly from the same quarter a year ago ($893.4 million), while EPS ($0.25) was a penny shy of last year. The resilience in the share price in the wake of an underwhelming quarter is why you have undervalued, low-volatility stocks like this in your portfolio. At 14 per share now, GTES still has 14% upside to Bruce’s 16 price target. BUY
Kimberly-Clark de México (KCDMY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was down slightly this week after getting a modest earnings bump the week before. The stock has basically been at 11 per share for the past month. The company is the Mexican subsidiary of Kimberly-Clark (KMB) and produces and sells in Mexico and overseas a wide range of consumer paper products. It’s a play on Mexico’s manufacturing discount, which is drawing interest thanks to wages that are 25% lower than in China and the U.S. BUY
Las Vegas Sands (LVS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, pulled back to 62 after hitting three-year highs above 64 the week before. The stock is still up 29% year to date thanks in part to strong revenue growth as customers return to the gaming company’s Macau casinos as China has finally loosened the reins on its stringent zero-Covid policies. In the first quarter, revenues improved 125% year over year and reached $2.12 billion – its best quarter since 2019, before the pandemic. BUY
Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, not only held its gains following a big earnings gap the week before but tacked on a couple points to hit even greater 52-week highs above 307. That’s a bullish move considering the rest of the market was down last week, and most big earnings winners tend to retreat a bit on the heels of huge gaps. Wall Street must still be digging the company’s latest earnings report: 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 28% year to date. BUY
Novo Nordisk (NVO), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was up slightly this past week after reporting earnings on Thursday. Earnings were in line with estimates, while revenues came up short despite a 27% year-over-year improvement. Its Diabetes and Obesity Care business drove most of the growth, up 31% year over year thanks in large part to 59% growth in its popular diabetes drug Ozempic, which customers can also now use to lose weight. The Obesity segment saw even better growth (124%) with Wegovy sales really taking off now that U.S. supply issues have been solved. Offsetting those big gains was a 16% decline in the company’s Rare Disease segment. All in all, it was a strong quarter for this mega-cap biotech even with the revenue miss, and investors treated it as such, pushing up shares for the week after an initial – and short-lived – pullback. The stock is now up 25% year to date. BUY
On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, had a strong first week in the portfolio, up about 5%. In his latest update, Mike wrote, “Given all the air pockets out there of late, we’re very encouraged with the resilience of ONON, which has been holding its 25-day line and has even started to quiet down a bit. There are never any sure things, but in a ‘normal’ market environment, our confidence here would be very high that the stock is a new, fresh leader that is probably just starting a sustained advance. Given the current environment, though, we’re still optimistic but are also not in a rush to push the envelope, especially with earnings due out May 16. We’re holding on tightly to our half-sized stake and think you can start a position here if you’re not yet in—but will hold off averaging up for the time being.” BUY
Realty Income (O), originally recommended by Tom Hutchinson in Cabot Dividend Investor, keeps holding in the 61-62 range, where it’s been for close to a 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 Value Investor, kept falling even after reporting strong earnings two weeks ago. The company reported 92 cents per share in earnings, 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 have done nothing but tumble since. That’s concerning. Let’s downgrade this to a Hold, though we’ll hang on to it for at least one more week since a) the ex-dividend date is tomorrow (May 9) and b) the stock now has 78% upside to Bruce’s 75 price target. MOVE FROM BUY TO HOLD
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, appears to have bottomed at 153 in late April and has slowly clawed its way back above 170 since. There wasn’t much news this past week, although the great Warren Buffett did call Elon Musk a “brilliant guy” at the annual Berkshire Hathaway shareholders meeting over the weekend. It’s a nice reminder for some investors who may have been thinking otherwise after witnessing Musk’s many missteps upon acquiring Twitter late last year. Thankfully, Tesla is not Twitter. Keeping at Hold until we see more recovery. HOLD
Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, broke out in a big way after earnings last Tuesday. The stock shook off its 30-32 range and has risen to new 52-week highs above 38 this morning. Mike had much more on both the company and last week’s earnings report in his latest update: “While the market (and especially growth stock) action remains sour, one pattern we’re seeing all over the place is this: A stock got slashed early last year, then basically bottomed out for many months before staging a solid rally for a few weeks or even months—but then it backed off again (but in a relatively shallow way) during the past three months as the market pulled in and the banking issues have surfaced. With fundamentals still looking great, this type of pattern represents the vast majority of setups we’re seeing out there, and if the market can get out of its own way, we think many can and will launch into sustained uptrends. That long preamble leads us to Uber, which has this exact pattern and is a name we had high hopes for earlier this year—but were forced to sell when shares cascaded more than 20% from their highs when the market keeled over. However, the big-picture story—that the firm remained a leader in two growing fields (ridesharing and delivery) and was now focused on earnings and cash flow—hasn’t changed at all, and after a fantastic Q1 report this week, the stock is again showing intriguing power. In the quarter, bookings were up 22% on a currency-neutral basis (ridesharing up 43%, Delivery up 12%), with monthly active users totaling more than 2.1 billion (up 24%) and adjusted revenue for those two businesses up 33%. More important was that EBITDA continued its climb ($761 million, up 14% from the prior quarter) while free cash flow was around 27 cents per share—all while the Q2 outlook was very solid. UBER responded very powerfully on Tuesday (even as the market and financial stocks were weak), and really, the action since last August looks like one big proper launching pad with many big weeks of buying volume. Of course, the market is still an issue, but UBER is back on our watch list, and we think it can be a liquid leader of sorts if and when the market finally turns up.”
Because we added the stock much later than Mike did, our losses during the March pullback were less damaging, and thus we held on to UBER. Now we’re up double digits on the stock. Keep buying if you haven’t already done so. BUY
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has encountered some rare selling, falling 6.7% since bumping up against resistance at 551 in late April. No matter. There was no news, the stock remains well above its 200-day moving average, and we’re still up roughly 35% on it. Buy the dip. BUY
UnitedHealth Group (UNH), originally recommended by Tom Hutchinson in Cabot Dividend Investor, shed a few points this week but appears to have set up shop in the 482-495 range since a mid-April pullback. 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 has 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, keeps taking sharp dives only to return to its 232-234 top. In his latest update, Tom wrote, “V has been hanging very tough near the high point of the recent range. The payments processing company once again exceeded expectations on earnings. Visa grew earnings per share by 17% and revenues grew double digits versus last year’s quarter. And this is what the company does in a bear market with the economy slowing. It can really take off when the market recovers for good. V should be higher by the end of the year but there is a chance it pulls back somewhat after moving to recent highs.” BUY
Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, is hitting new all-time highs after a strong earnings report last Wednesday! Mike detailed the report, and ensuing gap up, in his latest update: “The good vibes continued this week after another barnburner of a quarterly report: In Q1, system-wide sales rose 30%, with domestic same-store sales rising a whopping 20% (!!), both of which propelled revenue to a 43% gain, while EBITDA rose 60% and earnings cruised past expectations. The cookie-cutter story, too, remains in fifth gear, with 1,996 restaurants open at quarter end, up 37 from the prior quarter and up 11% from a year ago. (Interestingly, Wingstop is starting to get some gravity overseas, with 243 locations now, up 20% from a year ago—long term the firm thinks it can have thousands of locations internationally.) Not surprisingly, the stock was all over the place the first couple of hours yesterday after results were released (short-term traders aimed to sell on strength), but WING ended up closing at new all-time highs and holding there today.” We now have a 21% profit on the stock in just over two months. 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, pulled back sharply even after a strong earnings report last Thursday. Considering the stock was at all-time highs prior to the report, it’s possible investors were looking for any small reason to shed a few shares. Tyler elaborated on the report in a special bulletin to his subscribers last week: “Xponential Fitness reported another good quarter of top-line growth after the close yesterday though profitability missed expectations. Revenue was up 40% to $70.7 million and beat by $5.3 million while EPS of -$0.02 improved by almost 90%. 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. Stepping back, the company continues to see a lot of demand for new franchisees and with leases signed six months ahead of new studio openings, investors should feel reasonably confident in the growth trajectory through this year. It’s worth noting that it only costs around $300K to $350K to open one of these boutique studios, whereas the cost to open a full-fledged gym, like with Planet Fitness (PLNT), is around $3 million. Xponential has also been able to increase its royalty by a percentage point with the Stretch Lab brand (to 8%) and may do the same with some other brands (Club Pilates being one). After the report Piper Sandler stayed at overweight (price target of 42), B. Riley kept at buy (PT from 40 to 46) and Bank of America kept at buy (PT from 38 to 40). XPOF was up early and is now (oddly) bucking the strong market by trading down. We’ll stick with it.” So will we – it remains our best-performing stock of the past six months, even after the dip. One could view it as a buying opportunity. BUY
The next Cabot Stock of the Week issue will be published on May 15, 2023.