Cabot Stock of the Week Issue: October 23, 2023

So much for the bounce-back.

A week ago, that’s what October was looking like. But with bond yields poking above 5%, more tough talk from Jerome Powell, the escalating war in Gaza, the House of Representatives continuing to be speaker-less and several earnings blowups (see Tesla, below), there’s just too much macro holding the market back at the moment. So, stocks touched new post-summer lows last Friday, though they are notably up today.

At some point – perhaps sooner than we expect – the next rally will arrive. And there are a lot of indicators (overly bearish investor sentiment, a history of October bottoms, etc.) that suggest the next big move is up. But we have to see it to believe it. So, for now, we’ll maintain a relatively cautious stance, trimming an underperforming position today and downgrading another to Hold.

And yet, there are enough glimmers of hope out there (remember: it’s still a new bull market!) that today we’re adding a mid-cap software company with tons of growth potential, recently recommended by Tyler Laundon in Cabot Early Opportunities. Here it is, with Tyler’s latest thoughts.

Dynatrace Inc. (DT)

Dynatrace (DT) can be a tough company to understand if you’re not very tech-savvy. But at a very high level, it’s a software company with solutions that help very large organizations monitor their ever-expanding IT environments.

On a slightly more granular level, Dynatrace helps organizations monitor all the infrastructure and applications they rely on. And its technology platform mixes in a good deal of proprietary automation and AI as well.

It’s used by a lot of different departments within large companies, including sales, marketing, IT application support, IT infrastructure support, DevOps and more.

If you’re looking for a short list of companies with toes in the same sandbox we’re talking Datadog (DDOG), Splunk (SPLK) and New Relic (NEWR). It’s worth mentioning that Splunk is being acquired by Cisco (CSCO) while New Relic is set to be acquired by private-equity firms Francisco Partners and TPG.

Back in August Dynatrace management struck a conservative tone on the Q1 fiscal 2024 earnings call, even though there appeared to be a lot of fresh interest and the pipeline was filling up nicely. Management said new logo growth was up 15%, well above its target of low to mid-single-digit growth for the year. Management also said that seven-figure-deal activity was strong.

On the product front, the company talked up a new AI solution, Davis CoPilot, which adds a host of causal and predictive AI features to the company’s existing AI solutions. Dynatrace expects Davis CoPilot will drive more use from customers and ultimately lead to larger deals, as well as help improve the return on investment that customers get on the platform.

The company also acquired Rookout recently, a troubleshooting tool for cloud-native applications.

Since then, I’ve read more than a couple analyst notes about customers moving to Dynatrace for some of their workloads due to aggressive price hikes from other industry players.

It’s a bit early to say the floodgates are opening, but there’s definitely a lot going on in this market, both in terms of customers evaluating their options and significant M&A deals.

Dynatrace has its Q2 fiscal 2024 earnings report coming up next Thursday, November 2^nd. Revenue is seen up 23.4% to $344.6 million. EPS is seen up 21% to around $0.27.

Looking out further to the entire fiscal year, which ends in March 2024, analysts see Dynatrace growing revenue by 21.7% to $1.4 billion, then by almost 19% in fiscal 2025.

EPS should be up about 8% to $1.05 this year, then jump by more than 15% (to $1.21) in fiscal 2025.

In other words, over the next two years, revenue is seen growing at an average annual pace of roughly 20%, while earnings growth should average about 12%.

Like a lot of companies that went public shortly before the pandemic, DT had a great start, crashed, then came roaring back ... before falling prey to the post-pandemic bear market of 2021-22.

In DT’s case, the high was around 80 (October 2021) and the low was around 30 (May 2022).

The stock entered 2023 trading in the 35 – 40 range and enjoyed a lift after earnings reports in the first half of the year, then bumped up against the 55 level for most of July. Following the August 2 earnings report DT slipped, but never fell below 45. That price has acted as a floor over the last two and a half months, while 50 has been the ceiling.

With the stock trading around 47 now, earnings expectations appear relatively balanced and, with the report coming out next week, it seems like a buyable setup.

Current Recommendations

Changes Since Last Week:

Blackstone Inc. (BX) Moves from Buy to Hold
Zillow Group (ZG) Moves from Hold to Sell

As I wrote in the opening, we are parting ways with another stock today: Zillow Group (ZG), which we were probably a bit too early on – the housing sector is a mess right now. We are also downgrading Blackstone to Hold after a rough earnings report. Most stocks in the market, and therefore our portfolio, were down last week, but most remain in recent ranges after a nice start to October. With plenty of earnings reports on the horizon, potential catalysts abound.

Here’s what’s happening with all our stocks as we enter what feels like a pivotal stretch for the market.

Updates

AdvisorShares Pure U.S. Cannabis ETF (MSOS), originally recommended by Michael Brush in Cabot Cannabis Investor, has fallen through support in the 6.9 range, and was down 6% in the last week. In this case, no news is bad news, as the lack of a House speaker is preventing Congress from doing much – including making headway on the SAFER Banking Act that would grant cannabis companies access to U.S. banks. While it’s unlikely the Republican-controlled House would pass the SAFER Banking Act even when it does have a speaker, the bigger domino would be Drug Enforcement Administration (DEA) approval of rescheduling cannabis from a Schedule I to a Schedule III drug, as recommended by the Food and Drug Administration (FDA) in late August. When that happened, MSOS shares nearly doubled in just two weeks. Full approval of rescheduling – which could come before year’s end – is likely to cause a similar spike in U.S. cannabis stocks. Thus, MSOS will remain in the portfolio. BUY

Alibaba (BABA), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has fallen below 84 support on no news. Here’s what Carl had to say about it in his latest update: “The stock is cheap relative to past and projected earnings. It just needs the right catalyst. Overseas growth and higher Chinese consumer spending could be two of them. E-commerce is its breadwinner, however, accounting for more than half of Alibaba’s revenue, and roughly the same proportion of its profits.” 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. Now it’s right in the middle. Shares have 43% upside to Bruce’s 14 price target. The 7.8% 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, reported earnings and they weren’t good. The firm’s third-quarter EPS results declined 12% year over year – worse than expected – as higher interest rates took a toll on asset values. Private equity and real estate are among Blackstone’s largest assets, and right now they’re having to hang on to most of those assets rather than cash out – hence the earnings shortfall. Net profits from asset sales were down 36%, to $259.4 million, for the quarter. So, BX shares got bludgeoned, down more than 10% since the earnings announcement last Thursday. Given the sharp decline, with no bottom in sight yet, I’m going to downgrade BX to Hold. The only reason to hang on to it is that BX is what Mike calls a “Bull Market Stock,” meaning it thrives in bull markets. We’re still technically in a bull market, though it sure doesn’t feel like one right now. But, with a lot of indicators pointing to higher prices in the months ahead, we’ll keep BX in the portfolio for its upside – as long as it doesn’t do too much damage. I wouldn’t start any new positions right now, though. MOVE FROM BUY TO HOLD

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, gave back about half its gains from the previous week as its proposed deal to buy VMWare (VMW) came under new threat by Chinese regulators. The $69 billion acquisition seemed all but a done deal a week ago, prompting the big run-up in shares. VMWare, a Chinese company that specializes in virtualization software, said the deal could be closed by month’s end. Now, it seems up in the air again. Still, AVGO stock is up more than 3% in October. If approved, the VMWare deal would greatly enhance Broadcom’s artificial intelligence profile – which is a big reason the stock is up 54% year to date. BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was unchanged this week after the company announced better-than-expected preliminary net profits for the third quarter with the next earnings report expected on October 31. The Chinese EV giant expects Q3 profits to rise at least 67% on record sales – a stark contrast to Tesla (see below) and other EV makers at the moment. It speaks to BYD’s singular growth in the electric vehicle market right now, and further enhances our belief in this stock as one of the best long-term investments out there. We’ll know more next week. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, dipped from 44 to 43, but has still mostly held firm amidst all the selling the last couple months. Earnings are due out this Thursday, October 26. Analysts are expecting both revenue and earnings to be essentially flat. Given that the company has beaten earnings estimates the last four quarters, it’s possible they’re underestimating Comcast again. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, pulled back about 5% after hitting new 52-week highs above 187 a week ago. In his latest update, Mike wrote, “CRWD is certainly one of the top liquid leader candidates among growth stocks should the environment turn for the better, with the story, numbers (including honest-to-goodness earnings and free cash flow), liquidity and chart (new relative performance line peak yesterday) that points to it being a magnet for institutional money—and, as we wrote last week, it’s a plus that the cybersecurity group as a whole is acting well, with names like Zscaler (ZS) and Palo Alto Networks (PANW) coming alive. There hasn’t been much on the news front, though some are picking up on a couple of good-sized insider sales; we’re always aware of that, but historically speaking, insider sales are not a great predictive tool for the stock—what counts most is the perception of big investors, and right now, that crowd is thinking positively. Earnings here won’t be out until around Thanksgiving, which reduces some event risk. All told, we’re holding onto our half-sized stake and we’ll be eager to fill out our position—if the market kicks into gear and the stock remains a top actor.” BUY

DraftKings (DNKG), originally recommended by Mike Cintolo in Cabot Growth Investor, bounced off 27 support and remains in its recent 27-30 range. In his latest update, Mike wrote, “It’s been a tedious stretch since the Penn National/ESPN announcement in early August, but given the market, DKNG has done about as well as we could have hoped for since then, with a strong snapback into mid-September and some higher lows during the past month. In other words, this is one of the reasonable (12 weeks long, 26% deep) launching pads we see before it forms, so if the market and earnings (due November 2) go well, we could see a breakout and sustained advance develop. It’s worth noting that ESPN Bet is still in the works and reportedly will launch by Thanksgiving, so that could have an impact on DKNG, good or bad, depending on any initial numbers. All in all, the big-picture outlook here is definitely positive, but with the stock in the middle of its three-month range, we’ll continue to sit tight and take our cue from the next decisive move.” BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, gave back some of its recent gains, falling 5% this week. Hopefully, most of you took my advice last week to book profits on a few shares with the stock at fresh all-time highs! Still, the company has plenty of momentum – weight-loss/diabetes drugs like Lilly’s Mounjaro and Novo Nordisk’s (see below) Ozempic and Wegovy are the growth story on Wall Street right now, especially as artificial intelligence fever has cooled. So, for those of you who are late to the LLY party and have not yet bought, this dip looks like a buying opportunity – even with the stock up 59% year to date already. HOLD

GitLab (GTLB), originally recommended by Tyler Laundon in Cabot Early Opportunities, was back down to 44 after rising as high as 48 last week. There was no company-specific news bringing it back to earth. In his latest update, Tyler wrote, “GitLab (GTLB) has been with us since July, and over the last three months, growth estimates have trended higher while the stock has just gone sideways, in the 41 to 54 range. The company’s third quarter doesn’t close until the end of October (fiscal year ends in January) so Q3 results probably won’t be out until December. But the trend is good. Back in July it looked like Gitlab would deliver full-year fiscal 2024 revenue growth of 28% ($543 million) and EPS of -$0.15. But we’re now looking for 31.6% revenue growth ($558.4 million) and EPS of -$0.06 (a $0.09 improvement over just a few months). Embedded in these estimates is the assumption that Q3 revenue grows about 25.5% to $141.6 million and EPS is right around breakeven (-$0.01 is consensus). It’s worth mentioning that the expected revenue growth rate in fiscal 2025 is still hovering near 30% (i.e., no material deceleration from this year) and GitLab is expected to swing to profitability (EPS of $0.16).” We’ll keep it at Hold for now. HOLD

Krystal Biotech (KRYS), originally recommended by Tyler Laundon in Cabot Early Opportunities, dipped below 110 for the first time in more than two months but has quickly recovered along with the market today. There has been no news. In his latest update, Tyler wrote, “Krystal Biotech (KRYS) hasn’t nailed its earnings date yet but it should be around November 8. The biotech is just transitioning to commercial stage with Vyjuvek (gene therapy treatment for dermatological disease DEB) in Q3, so estimates are sort of a best guess at this point. With that caveat, Q3 revenue is seen around $6.4 million then $23.4 million in Q4, for implied full-year sales of $32 million. That jacks up to roughly $184 million in 2024 (475% growth). There will be a lot of details to digest on the call around infusion, handled by Option Care Health (OPCH) and Amedisys, as well as other shots on goal that haven’t gone in (yet).” BUY

McKesson Corporation (MCK), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was down only slightly in its first week in the portfolio, doing its job as a life raft against an otherwise volatile market. In his latest update, Tom wrote, “The market will bounce around in the near term. Sector performance rotates. In six months, we could have a solid economy or a recession. But McKesson’s business will continue to hum along regardless of what happens. It caters to a market that is growing all by itself and demand is unaffected by inflation, the Fed, GDP, or whoever is president. I don’t know what the next month holds for MCK, but the longer term should be stellar.” McKesson is a leading domestic wholesaler of branded, generic, and specialty pharmaceutical products. The company operates a supply chain that delivers products from 1,300 drug manufacturers to over 180,000 points of dispensation throughout the country. It has a solid base of over 40,000 customers and supplies about one-third of the U.S. drug distribution market. It’s a goliath with $284 billion in annual revenues. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, was flat ahead of its fiscal Q1 2024 earnings report tomorrow (October 24). Analysts expect 9.9% revenue growth and 12.7% EPS growth. Tyler provided more detail on those anticipated earnings in his latest update: “Azure revenue growth is always a big item, and that’s seen up 26.2%. Naturally, we’d like to see results come in a little better than expected, as has been the trend in six of the last seven quarters. And analyst estimates have inched ever so slightly higher over the last month. For the full fiscal year, we’d like to see signs that revenue can grow by at least 11.2% to $236 billion. And of course, we want to hear good things about ChatGPT, the Activision acquisition and so much more. Take note, in fiscal 2025 revenue and EPS growth is expected to accelerate to 13.4% and 15.2%, so there’s plenty of gas left in the tank here.” BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, is down about 4% in the last week after hitting new all-time highs a week ago. No matter – that qualifies as a natural pullback after reaching new heights in a tough market. Besides, there was some good news for the maker of Ozempic and Wegovy: It raised both its profit and revenue outlook for full-year 2023 due to higher-than-expected sales for both its signature weight loss/diabetes drugs. Preliminary sales numbers showed that sales increased 33% through the first nine months of the year, while profits improved 37%. Also, Novo Nordisk announced a deal to acquire ocedurenone for uncontrolled hypertension from Singapore-based biotech, KBP Biosciences, for up to $1.3 billion. The candidate is being developed in a Phase III study, for uncontrolled hypertension and advanced chronic kidney disease (CKD). So even with two of the most revolutionary new weight loss drugs already on shelves, Novo has more in the hopper that could lead to even greater revenues going forward. BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, pulled back sharply from its highs above 38, falling about 7.5%. Despite the decline, in his latest update Mike wrote, “NTNX might be the best-looking growth stock out there, with a fresher subscription story and longer-term outlook of booming free cash flow for years to come.” He added, “… the combination of an in-demand product and a completed move to a subscription model should produce buoyant sales, earnings and free cash flow growth for many years.” BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, was off 1.8% this week ahead of earnings this Wednesday, October 25. Big things are expected: Analysts are looking for 24% revenue growth and 30% EPS growth. The company has beaten earnings estimates in each of the last four quarters. We’ll see what happens Wednesday. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had a disastrous earnings report, and shares got knocked down to new post-summer lows as a result. Tesla’s adjusted earnings per share of 66 cents in the third quarter was down 37% from Q3 a year ago and the smallest quarterly profits in two years for the company. While revenue of $23.4 billion marked a 9% increase from a year ago, it was still shy of the $24.1 billion analysts were looking for. Meanwhile, its profit margins – long the envy of the industry – narrowed again, to 17.9%, down from about 25% a year ago. Elon Musk blamed high interest rates for the underwhelming sales, while margins are a victim of the company’s aggressive price cuts to keep pace with cheaper competitors, namely BYD in China. Some good news, though: the long-awaited Cybertruck is set to begin delivery by year’s end, though Musk warned it likely won’t be a money maker for up to 18 months. As for the stock, it’s back down to mid-August lows, trading right around the 200-day moving average. Any more of a dip, and we’ll likely move to Hold. But as long as it holds above 214-215, feel free to dip a toe – after all, TSLA rarely stays down for long. BUY

Tractor Supply Company (TSCO), originally recommended by Tom Hutchinson in the Dividend Growth Tier of Cabot Dividend Investor, is down about 3.5% since we last wrote. There was no news for the farm and ranch supply retailer; earnings are due out this Thursday, October 26. Analysts anticipated 5.9% revenue growth and 9% EPS growth. Those are reasons enough to hang in there, but if TSCO shares fall even further after earnings, we’ll probably bail on this one. HOLD

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, has dipped to the 42-43 range after hovering between 44 and 46 for about a month. In his latest update, Mike wrote, “In the last issue we wrote about how UBER was one of a decent number of stocks that had been etching higher lows, even as the major indexes were doing the opposite—but that pattern changed last week when the stock dipped below its August low, which prompted us to sell one-third of our position. Supposedly, the decline could be attributed to a lawsuit in France from taxicab drivers, though we’re a bit skeptical of that—either way, the weakness had us trimming the position. Now, to be clear, the chart is far from a horror show, as UBER stands just 12% or so below its recent highs with even the ‘sharp’ selling coming on average weekly volume. Thus, we still think the next big move could easily be up given the fundamental positives (earnings, due November 7, will have a big say in that) and are OK giving the rest of our shares some more wiggle room—though we also want to see some support show up soon to indicate big investors are buying the dip.” With a gain near 30%, we will keep the stock at Buy for now. BUY

Zillow Group (ZG), originally recommended by Tyler Laundon in Cabot Early Opportunities, just keeps falling, and I’m tired of looking at it. The stock has dipped well below 41 support, and our losses on it are starting to become problematic. While I believe this will eventually be a good company to own if and when the Fed starts cutting interest rates – likely sometime next year – that’s still a ways off, and so is a housing sector rally. So perhaps we’ll revisit Zillow someday in the not-too-distant future, but right now it’s time to say goodbye. MOVE FROM HOLD TO SELL

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 30, 2023.