Cabot Stock of the Week Issue: November 6, 2023

Now THAT’s more like it! Stock had their best week in months, shaking off the October (and September and August) doldrums to start November with a bang, with a boost from a very unlikely source … Jerome Powell! OK, so the Fed chief didn’t really say much of substance during his midweek press conference comments last week, but what he did say – “we’ve come very far with our rate hiking cycle,” “financial conditions have clearly tightened,” we’re “proceeding carefully” – the market liked, and interpreted all of it to mean, “No more rate hikes.”

We shall see if that’s the case. But what’s important now is that investors believe it’s the case. Declining bond yields (the 10-year note is down to 4.64% from highs around 5% in late October) and a better-than-expected third-quarter earnings season (+3.7% EPS growth among the 81% of S&P 500 companies that have reported thus far) have also fueled this mini-rally. Is it the start of the first meaningful run-up since the summer? This week should be telling.

So, with a bit more pep in investors’ step, let’s dive back into the growth pool by adding a mid-cap that’s little-known to most people, but is an essential tool for some of the largest companies in the world. The stock is up 37% year to date even after a recent pullback. And it’s a new recommendation from Cabot Early Opportunities Chief Analyst Tyler Laundon. Here are Tyler’s latest thoughts on it.

Elastic N.V. (ESTC)

Elastic (ESTC) is a Dutch-American company that was founded in 2012 with the name Elasticsearch, an open-source project that the founders started as an enterprise search engine.

It has since evolved into an entire ecosystem and open-source community. At the core Elastic remains a search company that develops SaaS solutions for enterprise search, logging, security, observability, monitoring, and analytics use cases.

The company is often referred to as Google for large companies. That’s a pretty good description. At a very high level, users turn to Elastic to do things quickly, accurately and securely.

The company’s solutions are packaged as the Elastic Stack (ELK Stack), which combines Elasticsearch, Kibana, Beats and Logstash into one platform that allows users to take data from any source and in any format, and apply search, analytics and visualization tools.

Given the importance of big data to enterprises this is a competitive space. And the rise of generative artificial intelligence (AI) has only made it more so.

Elastic’s market overlaps with that of Dynatrace (DT), Splunk (SPLK) and New Relic (NEWR). It’s not out of the realm of possibilities that buyers have been knocking on the door, just as they did at SPLK and NEWR.

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.

Interest remained high in late September when Elastic hosted its ElasticON AI event in San Francisco, CA, prompting Bank of America to flag the company as a “strategic generative AI tach stack disruptor” and raise their price target on shares to 90 (shares trading around 80 now).

Turning to the numbers, in the current fiscal year (2024, ends in April) revenue is seen up 17% (to $1.25 billion). The profit spigot is expected to open, driving EPS to $1.08 from $0.25 last fiscal year.

That all said, analysts are being cautiously optimistic about the ESRE potential. There could be some upside, depending on how things shake out.

ESTC came public at 36 in October 2018 and its pre-pandemic high of about 104 was hit in mid-2019. Shares were crushed during the pandemic but ultimately hit a new all-time high near 190 late in 2021. The stock followed the general tech stock pattern in 2022, selling off, enjoying a summer rally then fading to make new lows near year’s end. Since bottoming at 46.2 on January 6, 2023, ESTC’s chart is one of peaks and valleys, first in the 50 to 67 range (through May) then in the 57 to 75 range through August. The big change of character came after the September 1 earnings release when shares jumped 20% to close at the highest levels of the year (near 74). For the last two months, ESTC has been solid in the 70 to 82 range. With the stock trading at the low end of that range (71) as of this writing, this is a good place to start a new position.

Current Recommendations

Changes Since Last Week:

GitLab (GTLB) Moves from Hold to Sell
Krystal Biotech (KRYS) Moves from Buy to Hold

One more sell this week, as GitLab (GTLB) is going in the opposite direction from the rest of the market and just has not produced results for us after more than four months. Krystal Biotech (KRYS) was behaving just fine until a mysterious implosion on what appeared to be rather decent earnings this morning. So, we’ll downgrade that one to Hold and see if this is a simple overreaction to something minor in the numbers.

As for the rest of our stocks? Most of them had very good weeks. DraftKings (DKNG) led the way, up more than 20% on earnings. Eli Lilly (LLY) and Novo Nordisk (NVO) continue to crush it thanks to their ground-breaking weight loss drugs. And Uber (UBER) is getting a nice boost even before it reports earnings tomorrow.

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

Updates

Alibaba (BABA), originally recommended by Carl Delfeld in his Cabot Explorer advisory, busted out of recent resistance at 84 to reach 86 as of this writing. The Chinese e-commerce giant has two major potential catalysts coming in the next two weeks: This Saturday, November 11, is the annual Singles’ Day – China’s version of Cyber Monday, essentially, with Alibaba acting as the Amazon figure that lords over the day – and presales for the event have been very encouraging: Within an hour after its presales started, Alibaba’s Taobao and Tmall Group’s mainland platforms recorded a more than 200% year-on-year increase in turnover for 1,300 brands, while sales of nearly 700 brands grew better than five times, according to the company. The second potential driver is earnings, which are due out November 16. Expectations for those results are more modest, but a fifth-straight double-digit surprise could juice shares. No guarantees of course, but I like the chances of that one-two combination sending BABA stock – trading at a mere 9 times forward earnings – higher this month, and potentially beyond. BUY

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up about 6% in its first week in our portfolio. There was no news, other than the company announcing its third-quarter earnings date (November 21). So the latest upmove was likely in sympathy with the big move in the market last week. As Mike wrote in this space last week, “American Eagle has managed to maintain growth while boosting profit margins as consumers gravitate toward higher-end apparel offerings.” Also, “American Eagle said it’s seeing ‘positive momentum’ and an ongoing sequential revenue improvement trend supported by several new marketing campaigns and on-trend collections that are ‘resonating well’ with customers.” Trading at less than 12 times earnings, and a mere 0.80 times sales, that’s enough reason to buy this retail success story whose shares are already up more than 30% year to date. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, has been up and down of late, bouncing between the low 9s and the low 10s – though as of this morning, it appears to be knocking on the door of three-month resistance around 10.3. There’s been no news. Shares have 36% upside to Bruce’s 14 price target. The 7.6% dividend yield helps while you await a catalyst for this U.K.-based life insurance and investment management firm. HOLD

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, demonstrated its “Bull Market stock” bona fides last week, rising 6.5% to outpace the market. Mike suggested this stock on the premise that it tends to rise sharply during bull market rallies; unfortunately, we added it in early August, just as the summer rally was ending and a three-month sell-off commenced. Now that the market seems to be getting its act together, I like having this position in the portfolio. If BX breaks above the 50-day moving average (103), we’ll move it back to Buy. HOLD

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was up 4% last week, regaining about half its second-half-of-October losses on no news. Its proposed deal to buy VMWare (VMW) for $69 billion appears to be back on track after getting held up by Chinese regulators and could close as early as this month. If approved, the VMWare deal would greatly enhance Broadcom’s artificial intelligence profile – which is a big reason the stock is up 56% 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, 60 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. 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, had a nice bounce-back week, clawing its way back to 42 after dipping as low as 39 the previous week. As anticipated, Disney bought out Comcast’s remaining 33% stake in Hulu for $8.6 billion, which is good for the media giant’s cash flow coming off a quarter in which it lost 490,000 cable customers and 18,000 broadband users. Thankfully, those numbers were offset in the latest quarter by higher subscription prices, growth among its theme park segment (Universal Studios), and the Peacock streaming service, which added 4 million new paid subscribers in the quarter to improve to 28 million. We now have a 32% gain on the stock – not including the 2.7% dividend yield – in exactly a year, exactly double the performance of the S&P 500 during that time. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, is back near 52-week highs after falling sharply in late October. In his latest update, Mike wrote, “There’s been nothing much new from CrowdStrike in recent weeks, though there have been a couple of analyst tidbits, with one opining the firm will be a big winner when it comes to generative AI and another simply saying the cybersecurity spending environment looks healthy for 2024, with CrowdStrike likely to gain more than its fair share. Like most resilient names out there, this stock finally took on water during the market’s late-October slide, though it found support where it ‘should’ (above the 50-day line and near prior highs), which is far stronger action than the vast majority of stocks out there, and it’s bounced modestly (and on very light volume) since. CRWD certainly quacks like a stock that can move nicely higher if the market allows it.” We have a 13% gain on the stock in just two months – and that was with most other stocks falling. Very curious to see what it does if the market is truly getting in gear. BUY

DraftKings (DNKG), originally recommended by Mike Cintolo in Cabot Growth Investor, just became one of the big Q3 earnings season winners. The stock is up more than 23% – gapping up to 33 from 27 – since reporting excellent earnings last Thursday after the close. The online sports betting company reported a huge jump in users and upped its guidance, while Q3 sales shot up 57% year over year to $790 million, well above analyst forecasts. Also, losses of 61 cents per share (the company is not yet profitable) were smaller than anticipated. Kentucky legalized sports betting in the quarter, which helped, and DraftKings is now waiting on approval in Maine and North Carolina. Emboldened by the strong quarter, DraftKings upped its full-year sales guidance from $3.67 billion to $3.72 billion. We now have a 19% gain on the stock in less than three months. BUY

Dynatrace (DT), originally recommended by Tyler Laundon in Cabot Early Opportunities, got a nice boost from earnings too, gapping up to 47 from 44 after reporting last Thursday. The provider of application performance monitoring software reported a 26% increase in revenue, ahead of analyst estimates, while non-GAAP profits surged more than 40%. Full-year guidance remained the same. Here’s Tyler’s take on the quarter: “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.” BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was up about 2.5% in the last week after reporting strong earnings on Thursday. Q3 results 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. Lilly’s growth should only accelerate from here, as the company is expected to receive Food and Drug Administration (FDA) approval for Mounjaro in chronic weight management and donanemab in treating early Alzheimer’s disease. With a 78% gain on the stock in seven and a half months (not including the dividend), I’ll keep it at Hold for now. But if it demonstrates further post-earnings momentum, I may move it back to Buy. HOLD

GitLab (GTLB), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down in the last week and is currently trading right near five-month lows at 41. Let’s get rid of it. While the revenue growth rate (+30%) is impressive, the stock has not been in the four-plus months we’ve had it in the portfolio, and continued underperformance in a week when most other stocks were up 5-6% is a red flag. Time to move on. MOVE FROM HOLD TO SELL

Krystal Biotech (KRYS), originally recommended by Tyler Laundon in Cabot Early Opportunities, has imploded on earnings this morning, falling 13% in early trading. What went wrong? It’s hard to tell so far (coverage is, not surprisingly, light on this small-cap biotech). 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 will do some digging in the coming days to see what’s behind this post-earnings blowup on seemingly positive – or at the very least benign – results. In the meantime, let’s downgrade to Hold until the bleeding stops. Fortunately, we had a small gain on the stock prior to today’s cratering, so the overall damage is still modest. My guess is the stock will recover at least some of today’s early losses either by day’s end or certainly in the coming days. If not, we’ll say goodbye to it. For now, though, if you own it, don’t ditch it just yet. If you have not yet bought, don’t do so until the dust settles and we have more clarity on what exactly happened. MOVE FROM BUY TO HOLD

McKesson Corporation (MCK), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, has been up and down since reporting earnings last Wednesday, with no net movement. However, the stock is back trading at all-time high highs of 462, which it last touched in mid-October, so perhaps the strong quarter was already baked into the share price. 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. We now have a modest gain on the stock; if it breaks to new highs above 462, there’s a decent chance it may run for a while. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up 5.5% in the last week and is threatening to hit new 52-week highs (359)! 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 48% in 2023 and we have a 39% gain on the stock in exactly eight months. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, had a nice bounce-back week, rising 5% to top 100 and again knock on the door of new all-time highs (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, was up 7% in the last week, and has reclaimed most of its late-October losses. In his latest update, Mike wrote, “The firm’s platform has become a go-to for big enterprises to effectively power a company’s entire IT stack, allowing them to run and switch between clouds, boosting efficiency and saving money. And thanks to the firm’s switch to a subscription model, it appears that rapid and reliable growth is on the horizon—the numbers are already solid, and the top brass thinks free cash flow can expand nearly four-fold during the next five years, and it’s worth noting that the last time the top brass released a longer-term outlook (three years ago), it easily surpassed its goals, and that was despite a very tough tech spending environment the past couple of years. As for the stock, it actually broke out on earnings on September 1 and rallied toward 40 last month before a tough retreat with the market to end October. But NTNX held its 50-day line and has begun to bounce, albeit on light volume. Is it the perfect setup? We won’t say that, as those don’t exist in this environment—but the relative strength and story are both impressive.” BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, has taken off since reporting fantastic earnings two weeks ago. After bottoming at 530 on October 25 the stock has since risen to 604 – a 14% bump in less than two weeks. In the quarter, revenue climbed 25% (to $2.29 billion) while earnings jumped 49% year over year to $2.92 per share. The newfound momentum has pushed shares to the brink of new all-time highs (102); a push above could send them soaring even further. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has recovered somewhat after a rough third-quarter earnings report, finding support just under 200 to gain back 10% this week. Today’s news that the company is producing a new “low-cost” ($27,000 starting price) model, known as the Model 2, at its Berlin factory is boosting shares somewhat. Currently, the cheapest car Tesla sells is the Model 3, which goes for $38,990 (starting price). In an increasingly competitive global electric vehicle market landscape – with BYD surpassing it in sales last quarter – Tesla is attempting to broaden its product portfolio to make it more affordable to some, which is how BYD has gained a major edge in China. For now, the market likes it. But after downgrading the stock to Hold last week, we’ll keep it right there to see if TSLA can build on this mini-run. HOLD

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, got a huge bounce ahead of earnings tomorrow (November 7), bouncing off 40 in late October to nearly reach 48 as of this morning. In his latest update, Mike wrote, “UBER has had a tedious past three months that’s had us trimming our position twice, but the top-to-bottom correction hasn’t been awful (just under 20%) given the destruction in the broad market, and now it’s bouncing impressively, with today helped by a strong earnings reaction from delivery peer DoorDash (DASH). The main tell, though, should come from the firm’s own report, which is due November 7—all of the tidings of late have been positive, both short- and longer-term, so if bookings and EBITDA can again come in strong, we still think the stock has a shot at kicking into gear.” We have about a 40% gain on the stock in nine months headed into tomorrow’s report. 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 13, 2023.