Cabot Stock of the Week Issue: November 13, 2023

The market continues to look healthier, as the S&P has now been up nine of the last 10 trading days with a shot at 10 out of 11 depending on how the next couple hours go today. It’s encouraging, but not definitive; the Equal Weight S&P index, which has been a far more accurate gauge of what’s actually happening in the market this year since it does not so heavily weigh the Magnificent Seven mega-cap tech stocks that have carried the S&P 500 this year, is actually down in the last 10 days. If it can climb above its November 3 top at 5,744, and especially if it can breach its 200-day moving average around 5,900 – which would require a mere 3.5% run-up from current levels – then I think we can declare the bull market “back.”

Still, there is plenty of reason for optimism, as doom and gloom of the Fed and interest rates seems to be subsiding; the situation in Gaza is likely baked in, barring major escalation or spread beyond Gaza’s borders; and the arrival of November and December and the always-fruitful holiday shopping season the last two months of the year bring. So today, we add another growth stock, a name with which many of you might be familiar. It was a market darling as recently as 2021 but is now trading at less than a third of its peak. That could be soon changing, however, after a huge gap up that caught the attention of Mike Cintolo in Cabot Top Ten Trader.

Here’s what Mike had to say about it.

Pinterest (PINS)

Pinterest is a visually driven social media platform, in which users (called Pinners) find, post and share visual images, called pins. The fundamental driver of any social media business is its user base, which for Pinterest continues to show solid growth trends. In the latest quarter, reported last week, the company reported global monthly average users of 482 million (most are international, with “only” 96 million in the U.S.), up 37 million from a year ago and well ahead of expectations. That expansion reflected itself in better-than-expected financials, too, with sales handily coming in over consensus at $763 million and earnings per share at $0.28 (vs. 21-cent expectations). To date, it’s been advertising that generates money for Pinterest, but the company has been mostly unsophisticated about it so far (think display ads on a page), which in turn has contributed to mundane revenuer-per-user figures, especially outside North America ($6.46 here, but sub-$1 everywhere else). However, the upside is that there’s a lot of white space for the business to pursue more sophisticated ad options, and as management explores those options, it has been seeing good traction on a “Shop the Look” program. There, popular pins are linked to where users can buy all or some of the fashion or room décor pinners are excited about. Making the site more buying-friendly is a key priority for management, which is building in functionality for more direct links to retailers on images users post; in the latest quarter, management says such links done in conjunction with advertisers has doubled conversion rates. A move to using AI to surface more interesting content for browsers appears to be adding value as well. For the fourth quarter, Pinterest guided to revenue growth of about 12%, continuing the recent (slight) acceleration trend, while earnings are expected to surge 76% and come in higher than even the boom pandemic times.

As for the stock, PINS was crushed during the bear market and, while it did rally off its 2022 lows, shares found resistance in the 28 to 31 area multiple times this year, effectively building a long bottoming base. But the stock saw some interesting big-volume buying in late September, and of course last week’s earnings reaction was great, with many days of heavy accumulation, resulting in the second-largest volume week of the past three years. To be fair, PINS is still toying with that old resistance area, but we’re not expecting a major retreat—you can buy some here or on dips of a buck or so.

Current Recommendations

Changes Since Last Week: None

The market as a whole may not be anywhere near its highs, but in the Stock of the Week portfolio, you would think it’s 2021 all over again! Eight of our 20 pre-existing stocks are hitting either 52-week or all-time highs as of this writing. Several of them were up 8% or more in the last week despite modest gains in the market. And with the exception of Krystal Biotech (KRYS) – which we downgraded to Hold last week due to a mysterious earnings implosion that remains a bit of a mystery – none of our stocks are showing true signs of weakness.

Perhaps it’s a harbinger of what’s to come for the rest of the market. Regardless, we’re happy to have picked some winning horses of late, thanks in very large part to our talented stable of analysts. Here’s what’s happening with all our stocks.

Updates

Alibaba (BABA), originally recommended by Carl Delfeld in his Cabot Explorer advisory, gave back some of its recent gains, dipping from 85 to 82 ahead of earnings this Thursday, November 16. Expectations are fairly modest, with analysts looking for a small improvement in sales (1.8%) and OK earnings per share growth (10.4%). But the real reason BABA pulled back a bit was Singles’ Day – China’s version of Cyber Monday, held on November 11 every year – was a bit of a disappointment, with analysts estimating mere single-digit year-over-year growth for Alibaba while younger competitors like Pinduoduo (PDD) performed better. Overall, Singles’ Day sales on major Chinese e-commerce platforms improved 2.08% this year, according to data provider Syntum – down from 2.9% growth last year. The somewhat underwhelming all-around results prompted some selling in BABA stock, though not enough to knock it back to October lows just below 80. Trading at a mere nine times forward earnings estimates, I still like the upside here – especially after being knocked back a bit in the past week. BUY

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, keeps holding steady at 18, where it’s been since gapping up from the low 17s at the start of November. With earnings due out November 21 and Black Friday/holiday shopping season getting started days later, potential catalysts abound that could give this small-cap clothing retailer with momentum (+31% year to date) another boost. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, hasn’t moved since last week, though that’s not necessarily a bad thing, as the stock is knocking at the door of three-month highs at 10.3. There’s been no news. Shares of this U.K.-based life insurance and investment management firm have 37% upside to Bruce’s 14 price target – and also pay a hefty 7.7% dividend yield to hold you over until the stock gets there. HOLD

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is down a point in the last week, dipping from 98 to 97. The “Bull Market Stock” is trading well above its late-October lows (89), but much further below its September highs (115). As long as the market continues to recover – and investor interest returns – BX has a chance of eclipsing its September highs in the coming months. A move above the 50-day moving average line (103) would prompt us to move it back to Buy. HOLD

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, is at new all-time highs! The stock is up 8% since we last wrote, breaking above previous highs around 922, reached in late August, and has risen in 10 of the last 11 trading days entering the week (though it’s down in early trading today). There was no new catalyst last week, though there is growing belief Broadcom’s $69 billion deal to buy VMWare (VMW) will gain approval by the end of the month after getting red-flagged by Chinese regulators late last month. If approved, the VMWare deal would greatly enhance Broadcom’s artificial intelligence profile – which is a big reason the stock is up 68% year to date. BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, keeps meeting resistance in the 63-64 range, but the lows also keep getting higher – 55 in August, 59 in October, 61 last week. That’s an encouraging pattern, and a break above 64 could precipitate a long run. There’s every reason to believe a sustained rally is coming after the company reported yet another record-breaking quarter. In Q3, BYD outperformed Tesla, as net profits for the third quarter reached 10.41 billion yuan ($1.42 billion), an 82.2% increase from a year earlier, on a 38.5% rise in revenue to 162.15 billion yuan. Meanwhile, its profit margin increased to 22.1% from 18.7% in Q2 – a promising trajectory that contrasts Tesla’s dwindling margins, which are down to 17.9%. Overseas expansion is a big part of BYD’s growing appeal: The company sold 71,231 new energy vehicles (NEVs) outside of China in Q3 – a 323% improvement from the third quarter a year ago. It just began selling a second EV model in Japan in September and is in the process of continued expansion in Southeast Asia, while also investing heavily in European production. BYD is now the world’s largest EV exporter and the second-largest producer of EV batteries. The upside here remains enormous, with only its China ties holding the stock back in the eyes of U.S. investors. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, slipped a tad in the last week, dipping from 42 to 41, after a nice run-up from lows at 39 in late October. In his latest update, Bruce wrote, “On October 26, Comcast reported a strong quarter with earnings of $1.08/share increasing 13% and beating the consensus estimate by about 14%. Revenues increased 1% and were 1% above estimates. Adjusted EBITDA of $10 billion was 7% above estimates. The company generated $4 billion of free cash flow – an immense sum – which was used to repurchase $3.5 billion of shares in the quarter. Comcast’s share count is down 5% from a year ago. The balance sheet remains robust. Video subscriber totals continue to fall, and advertising was weak, but Comcast has ticked up its prices to offset these. Costs remain under control.

“Despite the strong numbers, Comcast shares fell. Declines in its domestic broadband customer count (down 18,000) and domestic video customer count (down 561,000), as well as declines in its advertising revenue (down 13%) were roughly comparable to their trends, but management wasn’t encouraging as they said these losses would likely continue. These metrics are seen as indicators of the core demand for Comcast’s products, so the lack of any meaningful improvement is seen as an enduring problem.

“Management strongly implied that it will be selling its stake in Hulu. An outlier risk is that Comcast ends up buying Disney’s stake, which would scuttle our Comcast thesis.

“The Peacock streaming service continues to grow at a hefty pace, but losses aren’t falling (8% smaller at $565 million) as quickly as we would like.

“Also, Disney essentially agreed to buy Comcast’s one-third stake in Hulu. Media comments say the price will be $8.6 billion, but that is only the minimum allowed price. Negotiations for the price are underway and there is no way to accurately estimate what the final price will be.

“There was no significant company-specific news in the past week.

“Given Comcast’s financial strength and enduring business model that has many strong operations, we raised our rating back to Buy last week. However, the sharp 11% increase in the share price off the post-earnings bottom, which erased essentially all of the sell-off, has removed most of the incremental appeal.

“Comcast shares … have 11% upside to our 46 price target.” BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, broke through 188 resistance to reach new 52-week highs above 200! The stock is up 9% since we last wrote. There was no obvious reason behind the run-up, which is potentially more encouraging, although volume has been light, as Mike wrote late last week: “CrowdStrike (CRWD) doesn’t report earnings until after Thanksgiving (November 29), so the stock is basically moving around on its own—and the action remains just fine, with the stock notching new price and relative performance (RP) highs earlier this week. Given the low-volume rally, we’ll simply stay put, but continued improvement in the market and a higher-volume push in the share price could have us upgrading back to buy.” We already have CRWD on Buy, and it’s been a big winner for us, up 23% in just over two months. Buy on dips if you haven’t already done so. BUY

DraftKings (DNKG), originally recommended by Mike Cintolo in Cabot Growth Investor, held its gains after a huge earnings gap the week before. That’s a good sign – enough to convince Mike to add to his position, as he wrote in his latest update. “DraftKings’ (DKNG) Q3 report was a beauty and has lifted the stock up and out of its range. Sales in the quarter rose 57%, well above expectations despite some bad luck, thanks to both a big gain in active users (up 40% from a year ago) and a continued gain in revenue per user (up 14%). Moreover, profitability continues to improve, with the top brass significantly slicing the expected EBITDA loss this year (to $105 million from $210 million) and starting with a 2024 forecast of $400 million in EBITDA, well above what analysts had been modeling. There is an Analyst Day next week (November 14), and the EPSN/Penn National site launch is coming around the same time, so if you want to simply hold what you have that’s fine. But we’re putting more emphasis on the four straight days of huge-volume buying that’s brought the stock to new price and RP highs—so we’ll fill out our position by adding another half-sized stake.” With gains now exceeding 20%, we will simply keep DKNG at Buy. BUY

Dynatrace (DT), originally recommended by Tyler Laundon in Cabot Early Opportunities, continues to get a boost from earnings earlier this month, tacking on another 8.5% this week. The provider of application performance monitoring software reported a 26% increase in revenue in the third quarter, ahead of analyst estimates, while non-GAAP profits surged more than 40%. Full-year guidance remained the same. Right after the report came out, Tyler wrote, “As I expected (and nice to confirm), new customers are moving to Dynatrace and are inquiring about AI solutions (which the company is still working on monetization methods for). No real negatives were flagged, with some of the optimization (fancy word for getting more for your money) trends other providers are seeing less of a factor at Dynatrace. Watching for DT follow-through in the coming week.” Well, that follow-through was a thing of beauty, and perhaps there’s more in store this week. BUY

Elastic N.V. (ESTC), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up 8.5% in its first week in the portfolio! There was no news, and shares still trade below their October peak (82). Elastic is essentially Google for large companies, a search company that develops SaaS solutions for enterprise search, logging, security, observability, monitoring, and analytics use cases. According to Tyler, “Interest has increased since Elastic reported Q1 fiscal 2024 results on September 1. At the time, management talked about the rise in customer activity around its ElasticSearch Relevance Engine (ESRE), a platform for building Generative AI applications and Vector Search capabilities.

“Even though it’s a relatively new solution the company already reports hundreds of paying customers. And is seeing more customers consolidate their workloads with Elastic as they more closely manage their spend.” For its current (2024) fiscal year, which ends in April, revenues are expected to grow 17% while earnings per share are expected to more than quadruple(!). Trading at less than half its late-2021 highs (183), there’s a lot to like about this stock at current levels. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is up another 2% since we last wrote, though it has retreated a bit since closing at new all-time highs above 619 last Wednesday. The stock is still getting a nice tailwind from stellar Q3 earnings, which topped estimates on both the top and bottom lines, as revenues improved 37% year over year to $9.5 billion (vs. $8.9 billion expected), while earnings per share came in at 10 cents, vs. 8 cents per share estimated. Not surprisingly, the solid quarter was driven by sales of the company’s breakout diabetes/weight loss drug Mounjaro, which were seven times higher than a year ago at $1.4 billion. What pushed shares to new highs (briefly) was the Food and Drug Administration’s (FDA) approval of Mounjaro, which came in the middle of last week, as expected. That raises the stock’s ceiling even further, though with an 85% gain on LLY in less than eight months (!), we will keep it at Hold for now. HOLD

Krystal Biotech (KRYS), originally recommended by Tyler Laundon in Cabot Early Opportunities, appears to have stabilized after its mysterious earnings implosion last Monday, though the damage was significant: Shares nose-dived from 122 to as low as 96 before rebounding late last week, and are only back to up to 99 as of this writing, still well below its 200-day moving average. There was no obvious reason for the blowup: Sales came in well ahead of expectations ($8.6 million vs. a $6.4 million consensus estimate). Research and development expenses narrowed (to $10.6 million from $11.4 million in Q3 a year ago). And net income was +$80.7 million – a vast improvement from a loss of $30 million a year ago. I asked Tyler what the heck happened, and he said he didn’t see any major red flags but wrote the following in a special alert to his subscribers: “Stepping back, it was a decent quarter. We’re seeing the stock move around a lot, probably because there wasn’t a blowout jump in new patient start forms and management was wishy-washy on Q4 (holiday, etc.).” We downgraded KRYS to Hold last week and will keep it right there. It will need to recover more than it has thus far to justify staying in the portfolio. Stay tuned. HOLD

McKesson Corporation (MCK), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is another stock that’s hitting new all-time highs! Shares are up a mere 1.5% this week but broke through 462 resistance and have continued on to 469. There was no news, though the company is likely still riding the high from its quarterly report. In its second quarter of fiscal 2024, McKesson grew revenues by 10% year over year, EPS by 3%, and raised full-year earnings guidance for 2024. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, is also hitting new all-time highs! Shares were up another 3.7% in the last week to reach 369 for the first time, on no major news. The company is likely still riding the high of a strong quarter, as revenue in the first quarter of fiscal 2024 grew 12.8% to $56.5 million (beating by 3.7%) while EPS of $2.99 grew 27.2% and beat by $0.34. Azure growth reaccelerated and margins expanded, largely thanks to AI-based solutions. This validates the artificial intelligence-fueled run-up in the stock this year, as MSFT shares are now up 53% in 2023 and we have a 41% gain on the stock in just over eight months. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, keeps hovering around 101, not far from its October (and all-time) highs of 102. Like its fellow GLP-1-fueled biopharma Eli Lilly, Novo Nordisk reported an excellent quarter on the back of its signature diabetes drugs. Revenues for the Danish company improved 29% year over year, with Ozempic sales jumping 56%. Wegovy, Novo’s other weight-loss drug, did only about half the sales Ozempic did in Q3 ($900 million to $2.1 billion), it’s expanding at a much more rapid clip, up from a mere $100 million in the third quarter a year ago. With both drugs growing at a fevered pace, the company raised its full-year sales growth outlook to a range of 32% to 38%. We now have a 50% gain on NVO shares in just over 10 months. BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has recovered all of its late-October losses. As Mike noted in his latest update, “The stock’s breakout in early September and resilience since (along with a very strong story and numbers) bode well.” BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, is up more than 100 points in the last two-plus weeks and is hitting new 52-week highs! There was no news, so shares are likely still riding the wave of the company’s strong third-quarter report, which came out in late October. In the quarter, revenue climbed 25% (to $2.29 billion) while earnings jumped 49% year over year to $2.92 per share. We now have a 14% gain on the stock in just over five months. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is mostly holding firm after recovering some of its gains on the heels of its semi-disastrous third quarter. That suggests investors are waiting to see what the next catalyst could be with the company still licking its wounds from another quarter of narrowing margins and getting surpassed in sales by BYD. It could be the Model 2, a low-cost ($27,000 starting price) EV, which is now under production at its Berlin gigafactory. Aside from that, things are unusually quiet for an Elon Musk company – probably by design. So, we’ll keep at Hold until a more immediate catalyst arrives to extend the shares’ post-earnings recovery. HOLD

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, got a nice boost before and after reporting earnings last Tuesday and is hitting new 52-week highs near 52! In his latest update, Mike wrote, “Uber’s (UBER) story is playing out exactly as we thought it would months ago—and, as opposed to some other situations in the past couple of years, the market is rewarding the stock. What’s interesting is that Uber actually missed some estimates—Q3 revenues were up just 11% and earnings of 10 cents missed the mark by two cents, some of which was due to accounting shenanigans and some due to a lackluster freight business. But the core ridesharing and delivery areas continue to do terrific: Trips rose 25% from a year ago while monthly active users were up 15%, and bookings for both ridesharing (up 30%) and delivery (up 16%) looked great. Most important, profitability continues to surge, with EBITDA of $1.09 billion (up from $916 million in Q2 and $761 million in Q1) and free cash flow coming in at $905 million, well above 40 cents per share. The Q4 outlook was solid, too, and the stock (which had already spiked last week) continued higher and is now challenging round-number resistance near 50. Similar to DKNG, there is the chance that UBER could pull in here—though there’s also the chance that the stock’s extremely encouraging snapback propels shares nicely higher. Yes, we trimmed on the way down, but the stock’s rebound has been very enticing. We’re going to restore our Buy rating for those that don’t own any, and we could even add back some shares we sold in the days ahead if the market firms up and UBER remains powerful.” In the Stock of the Week portfolio, we have kept UBER at Buy, and have been rewarded with a 54% gain in nine months. If you bought shortly after our early-February recommendation, it’s probably worth booking some profits by selling anywhere from a quarter to a third of your position now with the stock hitting new highs. But officially, I will keep our rating on Buy. 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 November 20, 2023.