Cabot Stock of the Week Issue: November 28, 2022

The stock market picture has improved as we head into the final month of 2022. Stocks are up about 11% since bottoming in mid-October, making the year’s losses less catastrophic, at least for now. December is usually a good month for the market, as the holiday shopping season and accompanying economic boom, at least for retailers, tends to lift spirits and open more wallets on Wall Street. But the Fed still looms, set to raise interest rates yet again next month. Inflation is still at four-decade highs too. The next set of numbers for both won’t be out until mid-month, however, so this could be another relatively quiet week for the market, especially now that Q3 earnings season has mostly wound down.

With most stocks acting fairly well, at least by 2022 standards, it’s a good time to take another big swing. So, this week we add a small-cap financial stock that has been on a tear of late, up more than 70% since mid-July. It’s a new discovery from Cabot Early Opportunities Chief Analyst Tyler Laundon and here are Tyler’s latest thoughts on it.

NerdWallet (NRDS)

NerdWallet (NRDS) is an online financial services company on a mission to “provide clarity for all of life’s financial decisions.” The company pursues this mission by operating a website and app for personal and small-business finance.

NerdWallet’s digital platform aims to give consumers and small businesses trustworthy and knowledgeable financial information so they can make smart money moves. Go to www.nerdwallet.com and you’ll find information on credit cards, banking, travel, personal loans, mortgages, insurance, investing and more.

Consumers and businesses in the U.S., Canada and the U.K. can access expert content and comparison-shopping marketplaces for free, as well as use a data-driven app to stay on top of finances, save time and money, and more.

The company makes money through fees paid by financial service partners. It has over 19 million average monthly unique users (MUU), defined as a user with at least one session in a given month, as of the end of September 2022.

That’s an increase of 11% over the previous year, which might not sound like much. But in a time where consumers have drifted away from online platforms, even modest growth is impressive. Registrations are up 60% over a year ago as a better user experience appears to be drawing in eyeballs.

Moreover, NerdWallet has taken steps to diversify its revenue base through international expansion (Canada) and stepping into new markets (small business, loan matching).

Regarding Canada, Q3 2022 MUUs were up 59% over Q2 2022. That’s a very nice growth rate and indicates a lot of initial interest from our neighbors up north.

NerdWallet is also working on integrating the recent $120 million On the Barrelhead (OTB) acquisition, which closed in July 2022. OTB, similar to NerdWallet, is a data-driven platform providing consumers and small businesses with credit-driven product recommendations. The strategy behind the acquisition was to bring in data and differentiated technology, especially in the small-business credit space. In 2021, OTB grew by 90% and generated $38 million in revenue.

In NerdWallet’s Q3, reported on November 2, the company surpassed expectations to deliver revenue of $143 million (+45%), well ahead of consensus of $135 million. EBITDA, a measure of earnings, was $14.5 million. That was way ahead of expectations of just $8.9 million.

Management said growth was driven by banking, credit cards and small-business solutions, which collectively overpowered weakness in mortgage loans due to higher mortgage rates.

While there are some moving parts here given the OTB acquisition, the growth is undeniably attractive, especially given NerdWallet is trending toward break-even, has a market cap near $1 billion and few investors are aware of it. Also, with a weakening economy, more consumers and small businesses are seeking financial advice. That’s good for NerdWallet’s business.

Look for revenue to grow by around 42% in 2022. That assumes Q4 revenue is around $140 million (+40%). As we get into the middle of 2023 the year-over-year benefit of the OTB acquisition will fall off. Analysts see 2023 revenue up 17%.

NerdWallet is trending toward profitability. Adjusted EPS in Q3 was $0.01. That could be as high as $0.08 in Q4. Still, full-year 2022 EPS is seen around -$0.19 then closer to break-even in 2023 (-$0.07 expected).

NRDS came public at 18 last November and, after an initial pop, began to decline with the market. By lockup expiration in May 2022, it was near 11. By July 1 it was trading at 7.8. That appears to be the bottom, and from August through October, NRDS bounced around in the 8.2 to 11.8 range. Shares blasted through the top end of that range after the Q3 earnings report two weeks ago and closed at 13.6 (+37%) the day after. NRDS has been trading between 12.4 and 14.5 over the last four weeks.

Current Recommendations

Changes Since Last Week’s Update

None

We have no changes this week, pushing our portfolio up to 17 stocks, the most we’ve owned since the summer. The fact that we’ve done very little selling for the last month-plus is a reflection of improved market conditions, though it’s possible another pullback is coming before the year’s out. For now, all our stocks are acting fairly well – even Tesla (TSLA) had a nice bounce-back this past week after a rough couple of months. Better yet – Ulta Beauty (ULTA) just blew past all-time highs, and Enphase Energy (ENPH) is on the cusp of doing so too. Here’s what’s happening with all our stocks.

Updates

Arcos Dorados (ARCO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, barely budged during the Thanksgiving-shortened week, and hasn’t really moved since reporting Q3 earnings on November 16. In his latest update, Bruce wrote, “On November 16, Arcos reported an impressive third quarter that reflects the ability of its strong leadership and brand to navigate the post-pandemic period. Revenues rose sharply (+38% in constant currency) even with high inflation/currency erosion in Argentina that dragged reported revenues down to +17%. Revenues were about 3% above estimates. Adjusted earnings of $0.23/share nearly doubled from $0.12 a year ago and were nearly double the consensus estimate of $0.12/share. Adjusted EBITDA of $103 million rose 15% from a year ago and was 13% above estimates. In local currency, Adjusted EBITDA rose 27% but was weighed down by higher food, paper, royalty fees and overhead costs.

“The company’s market position remains impressive. Guest traffic and market share increased, helped by continued strong growth in front-counter sales as the pandemic effects fade, but also buoyed by increases in McDonald’s out-of-store channels like digital and delivery. With its strong results, Arcos is accelerating its pace of new store openings. Cash flow from operations rose 70%, and the balance sheet remains sturdy.

“ARCO shares were flat this past week and have 16% upside to our 8.50 price target.” BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, was flat this past week. In his latest update, Tom wrote, “The infrastructure company reported terrific earnings early this month. It soundly beat expectations with funds from operations (FFOs) growth of 24% for the quarter. BIP had fallen more than 20% from the high in the last market selloff but the selling was unjustified as Brookfield’s crucial assets will continue to deliver steady earnings through a recession. The dividend is solid, and the stock is still cheap. (This security generates a K-1 form at tax time).” HOLD

Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, was down slightly (from 38 to 37) this past week on no news. This nuclear energy stock remains one of our better performers despite some extreme ups and downs of late, especially after the company reported earnings earlier this month that missed estimates by a wide margin. For the past three weeks, however, LEU has settled into a tight range between 37 and 40, which could be a nice launching pad should the market get going again in December. HOLD

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, rose from 34 to 35 this week, and is up from 30 at the start of November. Here are Bruce’s latest thoughts on the company and the stock: “With the return of Bob Iger to the CEO seat at Disney, that company may accelerate its likely plans to buy the remaining 33% stake in Hulu currently owned by Comcast. Disney has an option to buy the stake starting in January 2024, but of course, it can make a bid at any time. The current agreement locks in a $27.5 billion minimum value for all of Hulu, so Comcast could receive a minimum of $9.2 billion for its stake. Current estimates, however, suggest that Hulu could be worth as much as $50 billion, so if it sells its Hulu stake, Comcast could reap a windfall.

“A remote possibility (and a bad one, in our view) is that Comcast offers to buy Disney’s 66% stake. This massive purchase, of possibly as much as $20-40 billion, would saddle Comcast with new debt and a higher-risk asset. Hulu is a streaming powerhouse with over 45 million paying subscribers, but Comcast seems to be withdrawing some of its support in advance of a potential exit.

“Another outcome is that Hulu remains under split ownership, but this seems untenable.

“Comcast shares … have about 21% upside to our 42 price target. The shares offer an attractive 3.1% dividend yield.” BUY

Corteva (CTVA), originally recommended by Carl Delfeld in his Cabot Explorer advisory, continue to chop around in the 64-67 range, where they’ve been the entire month of November. Perhaps a breakout is nigh as the margin narrows. As Carl wrote recently, “Corteva uses emerging technology to help farmers improve crop yields and boost output. While the market is down sharply over the past year, Corteva is up (close to) 40%. Although the down market has caused many quality companies that are growing revenue and net profits to trade at bargain prices, a strong case can be made for stocks like Corteva that are recession-resistant and outperforming the market on a relative basis. Recently, Corteva reported a 12% increase in net sales and beat earnings expectations by about 50%. Earnings per share are projected to grow from $2.50 this year to perhaps $3.25 in 2023.” BUY

Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is up another 3% in the last week and is threatening to hit new all-time highs above 320. That would qualify as a major breakthrough … if it gets there. In his latest update, Mike wrote, “Enphase Energy has been battling with resistance in the 315 to 320 area in recent weeks, with three forays up there since late October, each time rejected as the sell-on-strength pattern continues. But ENPH has also refused to budge much and is again attacking that area—the more attempts, the greater the chance the sellers will lose control. The firm has been busy on the news front, though not with anything overly meaningful—just the normal flotsam and jetsam about expanding deployments of their microinverters and battery systems here and there. We obviously think the story has legs, so a decisive breakout (and not an immediate reversal) could have us averaging up. For now, we’ll hold onto our half-sized stake, but we’re OK nibbling here or on dips if you’re not yet in.” BUY

Green Thumb Industries (GTBIF), originally recommended by Tim Lutts and then Michael Brush in the Sector Xpress Cannabis Advisor, was flat this past week. The marijuana retailer is coming off a strong third quarter in which it reported 12% year-over-year sales growth, driven by much-improved retail sales in Illinois and New Jersey, plus the addition of 12 new retail stores. The stock is up 61% since the start of July. BUY

Kinross Gold (KGC), originally recommended by Clif Droke in his Sector Xpress Gold & Metals Advisor, held mostly firm this week, and has been hovering around 4 per share since gapping up from the low 3s in early November, when the company reported decent earnings (+41% EPS) that got a better-than-decent response from investors. The gold miner is also in the midst of a $300 million share repurchase program, which seems to be helping. BUY

Ormat Technologies Inc. (ORA), originally recommended by Brendan Coffey in his Sector Xpress Greentech Advisor, was flat after a big drop-off (from 100 to 90) the previous week. There was no real reason for the decline, and the stock is still about where it was at the start of November. Keeping at Buy. BUY

Realty Income (O), originally recommended by Tom Hutchinson in Cabot Dividend Investor, fell from 65 to 63 in its first week in the Stock of the Week portfolio. In his latest update, Tom wrote, “Earnings for this legendary income REIT surpassed estimates as it declared its 100^th consecutive quarterly dividend increase. Results continue to reflect the merger with VEREIT that was completed a year ago. Realty’s typical tenants of drug stores, convenience stores and supermarkets enabled it to continue raising the dividend through the pandemic and should prove resilient in this recession. This is a great safe dividend stock that got oversold in the last downturn and has been trending higher since the middle of last month.” BUY

Rivian (RIVN), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up slightly last week on no news, finally settling down after some wild swings in prior weeks. The electric vehicle maker is ramping up production and is on track to make about 25,000 new cars this year. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, recovered a bit last week after imploding the two months prior. It was up about 10.5%. A quiet week from Elon Musk probably helped, though the steep drop in one of the market’s great growth stories may have finally attracted some institutional bargain-hunters. But the stock remains well below its moving averages, so we’ll keep it at Hold for now. HOLD

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is up to new all-time highs! The stock has been on a roll for the past six weeks, rising nearly 20% to top previous overhead resistance around 446. The latest upmove comes in advance of the company’s latest quarterly earnings report, due out this Thursday, December 1. Analysts are anticipating 4.5% EPS growth and 10.5% revenue growth, so perhaps the market is already pricing in those increases. We’ll keep it at Hold until then since even a slight miss could send shares tumbling backward quickly given the strength of the recent run-up. HOLD

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, was down about 2.5% in the last week. Mike isn’t concerned, as he wrote in his latest update: “Wingstop (WING) has been pulling back of late, but we think its action is solid—shares are still north of the 25-day line (near 153) and volume has been very light on the dip, a sharp contrast to the wild ups and downs it was seeing in August-October. It’s not likely to be a rocket shot, but the path of least resistance is up and we’re close to filling out our position. If you don’t own any, we’re fine grabbing some on this dip.” We’ll keep it at Buy too. BUY

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, remains in a range between 34 and 36, where it’s been for the last three weeks. The fund offers both a high dividend yield and some of the highest-quality emerging market stocks in the world with an average price-to-earnings ratio of around 5. This ETF gives broad exposure to large caps, mid-caps and small caps in these countries with an emphasis on income and value. The stocks in its basket tend to be conservative, defensive companies with low valuations and high dividends. BUY

Xponential Fitness (XPOF), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was flat for a second straight week after a huge earnings gap up from 18 to 21 earlier this month. The fitness studio company beat sales estimates in the third quarter and raised full-year 2022 guidance, though it did fall short of earnings estimates. The stock looks good, and very buyable right here. BUY

The next Cabot Stock of the Week issue will be published on December 5, 2022.