Cabot Stock of the Week Issue: October 2, 2023

Last October, the market bottomed at the tail end of a very rough 2022, and a new bull market got underway. Will a similar rally commence this October? We shall see. August and September were down months for the market, and the last nine times both months have been down have resulted in a positive fourth-quarter return for the S&P 500 – with an average return of 9%. That doesn’t automatically mean it will happen a 10^th straight time. But the historical odds are very much in favor of a rally in the coming three months.

One sector in which a rally is already underway is cannabis. Yes, the same cannabis I swore off in this space about two months ago … a few weeks before the Food and Drug Administration (FDA) and Department of Health and Human Services (HHS) recommended rescheduling marijuana from a Schedule I drug (grouped with heroin, LSD and other notoriously harmful and addictive narcotics) to the far less harmful Schedule III category. It still would need final approval from the Drug Enforcement Administration (DEA), but the possibility alone was enough to send cannabis stocks soaring more than 60% in the ensuing two weeks. The sector has since given back about half those gains, but there’s enough momentum at the federal level now for cannabis stocks to finally get off their knees in a meaningful way after getting pummeled for two and a half years.

So today, as a mea culpa for bailing about a month early on the two cannabis positions we had in Stock of the Week in late July, I add a more conservative, less volatile cannabis position that hopefully won’t have the wild ups and downs that knocked us out the last time after accruing a quick loss. It’s the non-leveraged version of our previously held MSOX fund, and it tracks some of the biggest names in the industry. It’s up about 60% in the last month even after pulling back sharply from its September highs. And it’s a name Cabot Cannabis Investor Chief Analyst Michael Brush recommends to his readers.

Here it is, with Michael’s latest thoughts on the many cannabis sector catalysts that have sparked this long overdue rally – and could give the current rally more staying power.

AdvisorShares Pure U.S. Cannabis ETF (MSOS)

Last week, the Senate Banking Committee approved Secure and Fair Enforcement Regulation (SAFER), which would permit a lot more banks to serve cannabis companies. This would help them by allowing dispensaries to use credit cards and giving companies wider access to cheaper financing.

Cannabis lobbyist Don Murphy of the Marijuana Policy Project expects the full Senate could vote on the bill within weeks. This would be another big catalyst.

Passage is far from a sure thing – TD Cowen cannabis sector analyst Jaret Seiberg cautions that “key fights over social justice provisions are being punted to the Senate floor.” He thinks this lowers the odds of full Senate approval.

Another challenge for SAFER is that prospects in the Republican-controlled House of Representatives are not as bright. Murphy does not rule out passage here, as well. He predicts SAFER will be law by the end of 2024, but that it could happen much sooner. Again, Seiberg is less optimistic. “House GOP leaders either oppose the SAFE Act or are agnostic,” he says. “In addition, leadership of the House is a mess right now with conservatives and moderates fighting. It is hard to see much of an appetite for tackling something as politically tricky as the SAFER Act.”

Here’s a roundup of other key potential catalysts for the cannabis sector at the federal level.

* The Congressional Research Service (CRS) says in a new report this month that the Drug Enforcement Administration (DEA) will likely go along with a Department of Health and Human Services (HHS) recommendation to reschedule cannabis under the Controlled Substances Act (CSA). HHS has recommended cannabis be moved to Schedule III from Schedule I. The move would help cannabis companies by allowing them to deduct expenses against income in federal tax returns. Legal experts think the DEA may issue a proposed rule on rescheduling by the end of the year. That would be a meaningful catalyst for cannabis stocks.

* Senate Majority Leader Chuck Schumer (D-NY) is circulating an online petition calling for the federal legalization of cannabis. “It’s time to legalize marijuana nationwide,” Schumer said in a mass email that asked supporters to put their names and contact information on the petition. So far this year, neither Schumer nor any other senator has introduced legislation to legalize cannabis. House Democrats have filed such a bill, but its prospects are dubious in the Republican-controlled chamber.

Another key reason to hold medium-term positions in cannabis names is that what I call “cultural momentum” towards more favorable views on cannabis continues to build at the local level and around the world. Here are some recent highlights.

* We see this trend in rising cannabis sales. Rhode Island cannabis sales hit another record in August, when consumers purchased $9.67 million worth of product. That was the fourth month in a row of record sales. Recreational use was launched in December 2022, and medical use was already legal. Flower was the most popular product, followed by pre-rolls, edibles, vape carts, and concentrates. Other states posting record sales in August include Montana, New Mexico, Connecticut, Maine, Massachusetts, and Maryland. Canadian cannabis sales also hit a record level in July retail, at $446.1 million in Canadian dollars.

* An advisory committee in the National Collegiate Athletic Association (NCAA) has recommended that marijuana be removed from the list of banned substances list for college athletes.

* Alaska is loosening restrictions on cannabis advertising. The new rules will allow cannabis ads on buses, bus stop shelters, college campuses, and on signs around stores and billboards. The changes will also make it easier for suppliers to give away free samples and coupons, as part of their marketing. The changes go into effect October 8. Alaska legalized recreational use in 2014.

The combination of federal and cultural momentum has finally started to move the needle for cannabis stocks, as the sector is up 25% in the last month even after a sharp pullback in the last two weeks. But really, it’s the prospects of rescheduling and banking reform that have Wall Street’s attention.

The AdvisorShares Pure U.S. Cannabis ETF (MSOS) is a good way to gain exposure to the group in front of these expected catalysts.

Current Recommendations

Changes Since Last Week:

Neo Performance Materials Inc. (NOPMF) Moves from Buy to Sell
NextEra Energy (NEE) Moves from Buy to Sell
Tractor Supply Company (TSCO) Moves from Buy to Hold

We have two Sells in this week’s issue, as both NOPMF and especially NEE have completely cratered in recent days. So those were easy choices. TSCO is also trending in the wrong direction but hasn’t imploded just yet. It’s down to new 2023 lows, so it’ll have to show us something soon to stick around. For now, we’ll downgrade it to Hold. We now have 21 positions in the portfolio.

Here’s what’s happening with all of them.

Updates

Alibaba (BABA), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was flat this week. In his latest update, Carl noted that “University of Michigan’s data suggests China’s consumer sentiment is starting to tick up after a prolonged slump. Some of this sentiment is perhaps linked to improving manufacturing and exports of electric vehicles. This is a contrarian recommendation in a high-quality company selling way off its high.” Patience will likely pay off here. With the stock in a holding pattern above 84 support, it’s a good entry point for those who haven’t already bought shares of the Chinese e-commerce giant. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, is down another 2.8% since we last wrote, but is holding above early-September support around 9.3. The company is acquiring AIG’s United Kingdom life insurance operations for £460 million (about $560 million) in a deal that makes sense but maybe doesn’t move the needle a ton. Shares have 47% upside to Bruce’s 14 price target. Trading at less than 15 times forward earnings and with a price-to-sales ratio of a mere 0.75, this U.K.-based life insurer remains a very undervalued stock. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is down about 2.5% since we last wrote, on no news. It’s simple, really: Because it’s an investment-related business that caters to both institutional and individual investors, Blackstone is what Mike calls a “Bull Market Stock.” When things are looking up in the market, BX shares usually run even higher. When stocks are down, so is BX. So it’s no surprise BX has been down of late. Still, we maintain a modest gain in the stock, and with the bull market intact – all signs point to higher prices in the intermediate term, perhaps starting this month – it’s worth buying BX shares for when the rally resumes. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, didn’t move an inch this past week, at least in the aggregate, as it appears to have found a bottom (808) about 10 days ago. In his latest update, Tom wrote, “This AI juggernaut has cooled off since the big surge in the spring and early summer. That is to be expected and the stock has still returned a stellar (49%) YTD. It started bouncing around in a sideways fashion, but at the much higher price levels. It hasn’t really given up much after the surge but it is currently flirting with the lowest price levels since the surge.” BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, remains in the 60-to-65 range it’s been in since late August. In his latest update, Carl noted that the Chinese electric vehicle maker “reached a significant milestone by producing 500,000 Atto 3 electric sport utility vehicles just 19 months after the model first hit the market. BYD is also expanding its premium Denza brands. The Yangwang U8, a $150,000 off-road vehicle, will begin deliveries in October. BYD remains confident of selling 3 million EVs which is about the total number of EVs sold in America over the last decade.” Given its booming growth, BYD remains one of our highest-conviction long-term buys. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, keeps holding in the 44-46 range, where it’s been since the start of September. The lack of a downturn qualifies as a win in this market. This media giant is perhaps the steadiest, most reliable (+39%, not counting the 2.6% dividend yield) performer in our portfolio. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, had a big week, rising about 5.5% on little news other than several analysts reiterating or maintaining their buy ratings in the stock. Rather, the stock recovered most of its September losses. In his latest update, Mike wrote, “CrowdStrike (CRWD) hasn’t been immune from the market’s weakness, being yanked back down to the high area of its prior consolidation, though at this point it certainly seems like the stock is willing to go higher if the market can get out of its own way. Business-wise, everything seems on track, with management’s big bump to its various margin targets a sign that the booming earnings and free cash flow of recent quarters should continue for a long time while annualized recurring revenue continues to plow ahead.” BUY

DraftKings (DNKG), originally recommended by Mike Cintolo in Cabot Growth Investor, also recovered some of its September losses, adding 6% after bouncing off 27. That bottom was higher than the August bottom at 26, notes Mike. Here’s what else he wrote in his latest update: “Fundamentally, the firm inked a deal with a partner to launch online sports betting in Kentucky, which obviously isn’t the most populous state but doesn’t hurt the cause. As with everything else, we’ll see how it goes, but our guess is that the stock’s decision point will come soon—if the recent drop continues down to the prior (ESPN-induced) lows, it’s likely a sign that investor perception is falling as competition fears increase, which would probably have us looking for greener pastures. However, right now, we’re optimistic the stock is etching a normal launching pad as big investors look ahead toward buoyant sales and EBITDA growth.” Those are enough to keep us encouraged. Keeping at Buy. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, fell for a third straight week, this time by 3%. After months of going nowhere but up, the stock was bound to encounter some turbulence, especially in this market, and that’s what’s happening now. No matter. As Tom wrote, “So far it has just given up the most recent price spike. It is still selling right where it was (in mid-August). Investors are unlikely to cool on LLY because the has two potential mega-blockbuster drugs up for FDA approval this year as well as stellar earnings growth for the next several years.” We still have a 60% gain on the stock in just over six months. But we’ll keep it at Hold until finds a clear bottom. HOLD

GitLab (GTLB), originally recommended by Tyler Laundon in Cabot Early Opportunities, appears to have righted the ship a bit, bouncing from 42 to nearly 46 in the last few trading days. There was no news. We downgraded to Hold on weakness last week and will keep it right there. But the recent bounce is encouraging. HOLD

Krystal Biotech (KRYS), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down ever-so-slightly (from 115 to 114) in its first week in the portfolio. The company announced that it will present at the Chardan 7^th Annual Genetic Medicines Conference in New York tomorrow (Tuesday).

Krystal Biotech is a biotech company with treatments for rare diseases that is transitioning from clinical- to commercial-stage with the upcoming launch of its first gene therapy, Vyjuvek. The pipeline is focused on treatments for inherited dermatological and respiratory diseases, with investigational therapies for oncology and ophthalmology as well. As a result, revenues are set to explode: from zero in Q2 to $8.7 million in Q3 as Vyjuvek hits shelves to $25.8 million in Q4. That implies 2023 revenue of $33.1 million, then $186.4 million in 2024 (+462%).

That’s serious growth, and why we think the stock has immense upside potential. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, is up slightly in the last week even after insiders sold $49 million of shares. An analyst upgrade from Guggenheim’s John DiFucci likely helped backstop shares. We have a 25% gain on the stock in seven months, and it remains a strong long-term play because of its leadership position in the artificial intelligence boom. BUY

Neo Performance Materials Inc. (NOPMF), originally recommended by Carl Delfeld in Cabot Explorer, is down nearly 5% today, dipping below 6 support. While there was no bad news that sent shares of this rare metals company tumbling today, the fact is we’re now down more than 15% since adding it to the portfolio two and a half months ago. Let’s step aside here. No point in holding on to a stock that’s down more than 18% year to date and has been going in the wrong direction for the last month. MOVE FROM BUY TO SELL

NextEra Energy (NEE), originally recommended by Tom Hutchinson in the Safe Income Tier of his Cabot Dividend Investor advisory, has completely imploded in the last week, falling from 67 to 52 after the company slashed its dividend growth forecast through 2026 basically in half. We added this high-yielding utility stock two weeks ago to help fortify our portfolio in a bumpy investing environment – not add more volatility. With a 25% retreat in just two weeks, NEE is not doing its job. So no use hanging on to it and hoping for a rebound – not with the stock way below its 50- and 200-day moving averages. We’ll give it the quick hook before it can do any more damage. MOVE FROM BUY TO SELL

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, is down about 2% since we last wrote, and is bumping up against 89 support. We’ll see if it holds. In his latest update, Carl wrote, “Novo Nordisk (NVO) developed Ozempic for people with diabetes and Wegovy for weight loss. Since Ozempic was approved in the U.S., it has accounted for almost two-thirds of prescriptions for weight loss despite its high cost. Medical research cited by the Centers for Disease Control and Prevention said obesity-related healthcare accounts for more than $170 billion in excess medical costs on an annual basis. In August, it was announced that Wegovy may also cut the risk of serious events such as heart attacks and strokes by 20%.” There’s a lot to like here, and we still have a big gain in it despite the recent pullback. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, is about even in the last week and about even since we added it to the portfolio in early June. Obviously, we’d like to see some movement here soon, though the (temporary?) cooling off of the AI fervor hasn’t done this stock any favors. There may be some light at the end of the tunnel: The company plans to release several new workflow products with Generative AI built into them in the last few months of the year. The new offerings could enable it to boost prices across its IT, customer service and human resources workflow products by as much as 60%, it says. That’s enough reason to stick around. BUY

SI-Bone (SIBN), originally recommended by Tyler Laundon in Cabot Early Opportunities, remains in the same 20-to-23 range it’s been in since early August. There’s been no news. The company is a small-cap MedTech that specializes in treating patients with sacroiliac (SI) joint pain/injuries – specifically, it develops an innovative, patented implant to fuse the SI joint. BUY

Terex (TEX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is essentially flat in the last week but is once again re-testing 56 support. We should keep a close eye on that support level, especially after the stock received an analyst downgrade last week when KeyBanc reduced it from “Overweight” to “Sector Weight.” The analyst worried that order rates could “moderate from recently elevated levels,” though he did cite the possibility for “revenue increases and faster backlog monetization” now that supply chain issues have improved. Here’s hoping for the latter. But if the stock breaks below 56 support, we won’t keep TEX around much longer based purely on hope. Keeping at Buy for now. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, bounced back a bit this week, tacking on about 2.5%. About half those gains have come today, as the company released its third-quarter deliveries data, which at 435,059 were a 26% improvement over Q3 a year ago but down about 6.5% from the second quarter and well shy of analyst estimates of 461,640. The company attributed much of the quarter-over-quarter decline to planned downtime for factory upgrades, which cut down on production (-8%) as well. Its target goal of 1.8 million deliveries this year “remains unchanged,” the company said. So far, that’s been enough to sate investors, though Deutsche Bank cut its price target on the stock last week from 300 to 285 due to 2024 production concerns. Some good news: Tesla has submitted a proposal to set up a battery storage factory in India and plans to build a new EV factory in India that would produce a car priced around $24,000. BUY

Tractor Supply Company (TSCO), originally recommended by Tom Hutchinson in the Dividend Growth Tier of Cabot Dividend Investor, fell from 206 to 202 this week – a new 2023 low. An analyst downgrade (Gordon Haskett) didn’t help matters, nor did some recent weak consumer data. The company reports earnings later this month, which are supposed to be solid (6.6% revenue growth, 10% EPS growth expected), but the stock is going in the wrong direction. Let’s hang on to it for now, but a downgrade to Hold is in order given recent weakness. MOVE FROM BUY TO HOLD

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, appears to have stabilized, with 44 acting as support. In his latest update, Mike wrote that the stock had “held near 44 (a point above its August low, even as all major indexes have sunk beneath the August low) and, today, pushed a smidge back above its 50-day line—both solid signs of relative strength. Of course, that doesn’t guarantee anything if the market remains weak, but it’s a sign that Uber wants to head higher once the pressure comes off the market. The top brass spoke today at a conference, relaying that they remained focused on profitability (free cash flow, EBITDA, etc.) and want to become a ‘super app’ of sorts, entering travel-related products (in the U.K., where this is being tested, it’s moved into booking some flights, trains and busses with good success) given that so many users book rides outside of their home areas (on vacations, etc.). Translation: The potential remains huge for major free cash flow growth for a long time to come as its current and newer business lines push ahead.” BUY

Zillow Group (ZG), originally recommended by Tyler Laundon in Cabot Early Opportunities, seems to have found support in the 44-45 area. There was no news. The intermediate-term growth outlook – likely starting in 2024 – remains upbeat for both the sector and the company, which projects 12.3% revenue growth in 2024 after expected losses this year. As long as it keeps holding support, ZG is a Buy. BUY

If you have any questions, don’t hesitate to email me at chris@cabotwealth.com. You can also follow me on Twitter, @Cabot_Chris.

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 October 9, 2023.