Cabot Stock of the Week Issue: November 27, 2023

The market continues its banner November, with the Thanksgiving holiday-shortened week doing little to slow it. New record online spending over the Black Friday shopping weekend – an estimated $9.8 billion, up 7.5% from a year ago, with another $10 billion expected today, on Cyber Monday, according to Adobe Analytics – seems to bode well for the just-underway holiday shopping season and further erases any thoughts of a coming recession. So, the good times are (suddenly) rolling on Wall Street, and we’ll roll with them.

Today, we’re adding another mid-cap software player that was just recently recommended by Tyler Laundon in his Cabot Early Opportunities advisory. Here it is with Tyler’s latest thoughts.

Varonis (VRNS)

Varonis (VRNS) sells security software that’s used to protect enterprise data, from sensitive files and emails to confidential customer and patient records, financial data, strategic and product development plans and so much more.

The company is benefiting from a successful transition to the SaaS business model and there’s a potential AI boost to consider as well.

On the latter note, one of the biggest challenges for large companies looking to develop generative AI capabilities is how they protect their data. They need a very clear data governance framework that stops large language models (LLM) from leaking all the info they try so hard to protect.

That spells opportunity for Varonis, who specializes in setting data security and governance standards.

As Morgan Stanley says, Varonis could become a “key enabler of Generative AI adoption within the enterprise.” When management reported Q3 results a couple weeks ago management called AI a “game changer,” saying the technology should continue to boost growth as data governance becomes increasingly important.

Turning back to the SaaS transition, Varonis is blasting by its early goals to move to the cloud. When it first laid out its transition plans a few years ago, management called for 15% of new bookings to be SaaS revenue in 2023. In the recently reported third quarter of 2023, 59% of new business was under the SaaS model, well above expectations for 45%. SaaS now accounts for 15% of annualized revenue.

With just one quarter left in the year, analysts now see Varonis growing revenue by about 5% this year, to $496.7 million. Keep in mind that revenue grew north of 21% last year and is expected to reaccelerate to nearly 10% in 2024.

On the profitability front, EPS should be up around 78% to $0.32 this year, then analysts are penciling in just 10% EPS growth next year. I think that number is low, and actual EPS growth in 2024 will be more in the 30% to 60% range.

As for the stock, VRNS went public in February 2014 at 22 and reached a pandemic-era high near 75. Things then fell apart and VRNS hit a bear market low near 16 in November of 2022. After that washout VRNS began to gain altitude again, reaching 30 in February of this year. That was the top for a while, but VRNS was back to the 30 level after the Q2 earnings release in August. Shares mostly traded in the 30 to 32.5 range from August – October, then the stock stepped out after the Q3 report (October 30) and has continued to inch higher over the last two weeks. Now up to 40, a new 52-week high, it’s a good place to buy on dips.

Current Recommendations

Changes Since Last Week:

Alibaba (BABA) Moves from Buy to Hold

Not many changes after the abridged holiday week, though Alibaba (BABA) (which we’re downgrading to Hold today) and Krystal Biotech (KRYS) are on thin ice after recent earnings blowups. We’ll give each of them more time to recover before cutting bait in knee-jerk fashion after a short week. As for the rest of the portfolio, it looks great, as nine of our 22 existing positions are at or near 52-week highs as of this writing. Others, including Tesla (TSLA), are having very good bounce-back months.

There’s a lot to like in our portfolio. Here’s what’s happening with all our stocks.

Updates

Alibaba (BABA), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has stabilized around the 77 area since imploding after earnings, falling from a high of 87. The not-so-gory details from the earnings report reveal what investors didn’t like. Revenue, while up 9% year over year, fell just shy of analyst estimates and was down from 14% growth in the previous (fiscal 2024 Q1) quarter. Perhaps most concerningly, Alibaba’s Taobao and Tmall e-commerce businesses slowed to 4% growth, at a time when fast-charging rival Pinduoduo managed 66% revenue growth for the quarter. The other news item that Wall Street didn’t like is that Alibaba no longer plans to spin off its cloud division into an IPO, due to what Chairman Joe Tsai characterized as “uncertainties created by recent U.S. export restrictions on advanced computing chips.” While the ensuing selloff may have been overdone, the lack of bounce-back thus far is a bit concerning. As long as the stock can hold on to 77 support, let’s keep it in the portfolio. But I will downgrade to Hold until shows signs of actually bouncing back. MOVE FROM BUY TO HOLD

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was another earnings blowup as shares tumbled from 19 to 16, or roughly 15%, after an underwhelming report last Tuesday. But unlike Alibaba’s post-earnings selloff, AEO’s wasn’t deserved. The company beat top- and bottom-line estimates in the third quarter, with earnings improving 13% year over year and revenues increasing 5%. Also, the company upped its full-year guidance. So … why the implosion? This is possibly a buy-the-rumor, sell-the-news situation, as AEO had climbed from 14 to 19 in the two months leading up to the Q3 report, and shares still have not dipped back to those mid-September levels. So, until they do, let’s hang on here if you already own shares, and even buy if you haven’t already done so. This selling on an earnings beat is reminiscent of what happened with a lot of companies in the second quarter, most of which quickly recovered most of their losses. I think AEO will do the same. Keeping at Buy. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, held on to its gains from the previous week after the company reported strong revenue growth. Shares are now at their highest point since March and threatening to break above that level. The stock has 29% upside to Bruce’s 14 price target. We upgraded this U.K.-based life insurance and investment management firm to Buy last week and will keep it right there. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is acting like a true Bull Market Stock: The market is up sharply in November, and BX shares have raced even higher. BX is up 15% this month; the S&P is up roughly 8%. That’s precisely why we have Blackstone in the portfolio. Last week, we upgraded the stock to Buy after it broke above its 50-day moving average. We’ll keep it right there, as there’s been no letup. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was down about 1.5% after hitting new highs yet again the previous week. Still, the trajectory is decidedly up, as Tom wrote in his latest update: “The artificial intelligence juggernaut has reignited. AVGO has soared over 18% this month to a new all-time high and is up 80% YTD. Technology stocks have rallied strongly this month as interest rates have moved lower. AVGO had been held back by the tough environment for tech stocks and has been unleashed again. It was the Nvidia earnings report in May that ignited the furious AI rally in AVGO. We’ll see if this quarter’s (NVDA) earnings are a catalyst for further upside.” BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, had been knocked back yet again after meeting overhead resistance in the 63-64 area. This time, the dropoff is more pronounced, with shares down to the mid-57s as of this writing. It’s a frustrating pattern for shares of an otherwise stellar company. As Carl wrote in his latest update, “BYD (BYDDY) shares have been treading water, but the company is on the move. This week at the Guangzhou International Automobile show BYD released its Supercar Platform and unveiled its new electric SUV—the BYD Sea Lion 07. Founded in 1995 as a rechargeable battery maker, BYD now has stakes in EVs, rail transit, new energy, and electronics, with over 30 industrial parks in China, the United States, Canada, Japan, Brazil, Hungary, and India. BYD is also now the second largest producer of EV batteries in the world.” Given the company’s fast growth and pristine fundamentals, let’s treat the latest pullback as a buying opportunity. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, has been between 41 and 43 all month. Not much to report. We still have a solid 33% gain on the stock in just over a year, not including the 2.7% dividend yield, and this remains a steady outperformer despite this month’s neutral performance. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, is hitting yet another new 52-week high ahead of earnings this Tuesday. In his latest update, Mike wrote, “CrowdStrike (CRWD) remains in fine shape, and we’re impressed that it shook off the earnings gap down in peer Palo Alto Networks (PANW) last week. We’re also impressed that PANW has snapped right back to new highs, a good sign for the group. Of course, CrowdStrike’s own report, due Tuesday (November 28), will be key—analysts see sales of $777 million and earnings of 74 cents per share, but lots of the sub-metrics (margins, free cash flow, deal flow) will be key, as will any talk about the longer-term targets it released a few weeks back. As always, we’ll take it as it comes, though we’re optimistic that CRWD will remain under accumulation given its rare growth story and outlook. We’ll stay on Buy a Half, though aim for dips if you want to nibble ahead of the report.” We’ll stay on Buy as well. BUY

DraftKings (DNKG), originally recommended by Mike Cintolo in Cabot Growth Investor, is in the midst of a great November, up 41% this month. As of this writing, it’s at new 52-week highs. In his latest update, Mike wrote, “DraftKings (DKNG) breezed through its Analyst Day (which had some bullish numbers we wrote about last week—EBITDA target of $1.4 billion in 2026 and $2.1 billion in 2028) as well as the launch of ESPN Bet (which reportedly was off to a good start in terms of downloads, etc.), which is a good sign that the buyers are in control. Like many of the strongest names, a pothole is going to happen at some point, though with the breakout just a couple of weeks ago, the odds favor higher prices ahead. We’ll stay on Buy, though if you’re not yet in, you can consider nibbling here or looking for dips of a couple of points.” BUY

Dynatrace (DT), originally recommended by Tyler Laundon in Cabot Early Opportunities, held firm at 52 this past week. There was no news. We now have an 11% gain on this mid-cap provider of application performance monitoring software that grew revenues by 26% and EPS by 40% in the latest quarter. BUY

Elastic N.V. (ESTC), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up a point this week on no news. The company will report earnings this Thursday, November 30. 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. The stock trades at less than half its late-2021 highs (182) despite the recent run-up. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, held steady for a second straight week after pulling back from all-time highs in the first half of November. In his latest update, Tom wrote, “One of Lilly’s big drugs up for FDA approval got it earlier this month. Its weight loss drug, Mounjaro, was approved. Some analysts estimate this could potentially be a $20 billion per year drug. That would match the best-selling drug ever. It still has its Alzheimer’s drug up for FDA approval in the months ahead. LLY continues to hover right around the highs with no consolidation. Investors are unlikely to sour on the stock with its new drugs and expected 25% annual earnings growth in the years ahead even without these new drugs.” LLY remains our best-performing stock this year, with gains near 80%. HOLD

Intel Corporation (INTC), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, held mostly firm at 44 in its first week in our portfolio. In his latest update, Tom wrote, “Strong earnings, encouraging news about future business, and a much better market environment are turning INTC around. Intel received an analyst upgrade last week and rallied nearly 7% on the same day to a 17-month high. INTC is up over 28% in the last month, 37% in the past three months, and 67% YTD. Earnings indicate that Intel’s turnaround is well on track. It has promising new chips coming out in high-growth areas and its foundry business could be huge. The stock got dirt cheap, and investors are increasingly willing to bet on the company’s future.” BUY

Krystal Biotech (KRYS), originally recommended by Tyler Laundon in Cabot Early Opportunities, is down about 5.5% since we last wrote and hasn’t fully recovered from a mysterious cratering earlier this month on strong earnings. There was no obvious reason for the blowup (which sent shares tumbling from 122 to as low as 96): 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. So, I downgraded KRYS to Hold with the expectation that it would bounce back. It was doing so beautifully until this week when it bumped up against the 200-day line. Considering it was a holiday-shortened week, we’ll give KRYS a mulligan. But a dip below previous lows of 96 would have us abandoning ship. Hold for now. HOLD

McKesson Corporation (MCK), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, had a nice bounce-back week, rising nearly 3% to recover most of its losses from the previous week. There was no news. The company is coming off a fiscal 2024 second quarter in which revenues improved 10% year over year, EPS jumped 3% and it raised earnings guidance for the full year. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, keeps holding its all-time highs around 377. It no longer appears that Microsoft will be poaching Sam Altman or other OpenAI higher-ups after the bizarre firing-then-rehiring maneuver the board of that artificial intelligence non-profit think tank pulled last week. No matter. Microsoft’s AI strength was built without them, and remains an industry leader, pushing shares to their current lofty level. With ChapGPT growth at its back – along with its thriving Azure cloud computing wing and other areas of its diversified business growing well – there’s no reason to think MSFT shares can’t go higher in 2024, and beyond. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, again ticked to new all-time highs above 105 before pulling back slightly. In his latest update, Carl wrote, “The company announced it will ration starter kits of Ozempic in Europe and reduce supplies of another diabetes drug, Victoza, to prioritize producing Ozempic, which has seen a surge in demand from people using it to lose weight. The Food and Drug Administration (FDA) has approved Eli Lilly’s competitor drug under the name Zepbound. Demand remands very strong.” We now have a 55% gain on the stock. BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has recovered all of its late-October losses, and is at new 52-week highs! In his latest update, Mike wrote, “Nutanix (NTNX) is one of many leaders (and potential leaders) that has earnings coming next week—in this case, next Wednesday, November 29, with analysts looking for $501 million of revenue and earnings of 17 cents a share, though free cash flow and bookings trends for big IT projects will be just as important. NTNX hasn’t been quite as strong as some names this month, but it’s notched new closing highs a couple of times of late after a retest of its early-September earnings gap. We’ll stay on buy, but keep it small and/or look for dips if you want in this close to the report.” Good advice. I urge you to do the same if you don’t already own NTNX shares. BUY

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, keeps inching to new 52-week highs after a huge gap up in late October. As Mike wrote recently, “It’s not the go-go name it was during the pandemic, but Pinterest has a unique offering, and management is starting to make the right moves, all of which is helping the stock—PINS bottomed out for more than a year, but the Q3 report saw a wave of strong-volume buying and shares haven’t given up any ground since.” BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, was up another 1.5% last week to reach new 52-week highs. There was no major news. 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 21% gain in less than six months. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was flat this past week and has mostly held in the 230s for the past couple weeks. The only real news is that nine Swedish unions are striking against the company, refusing to put license plates on any new Teslas until a new collective bargaining agreement is reached. “This is insane,” wrote Elon Musk on X (formerly Twitter), which was thankfully the extent of what he tweeted this week. The strikes involve only about 120 mechanics, so they’re not putting much of a dent in the company’s bottom line or its share prices. Otherwise, things are quiet at Tesla for the moment, which, given some of Musk’s recent comments on other subjects (the situation in Gaza, namely), is a good thing. Keeping at Hold, but a decisive push above 240 would likely have us moving back to Buy. HOLD

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, was up another 2.5% to reach new 52-week highs above 56! In his latest update, Mike wrote, “Uber (UBER) remains very impressive, moving higher despite some items that could bring in selling. One example: The firm’s recent $1.5 billion convertible bond offering that will mostly be used to refinance existing debt—usually such a large offering would lead to a short-term dip for a few reasons, but so far, UBER has refused to budge an inch, a good sign that big investors are gobbling up whatever supply they can. Of course, a dip could still be in the offing here, but the sterling fundamentals and upside power bode well.” 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 December 4, 2023.