Cabot Stock of the Week Issue: October 30, 2023

This is a pivotal week for the market.

For one, the indexes are hovering perilously above their May lows, with both the S&P 500 and the Nasdaq entering correction territory (-10%) last week. On Wednesday, we’ll hear from the Fed, and while it is almost certain to hold interest rates steady, Jerome Powell’s words will matter as much as ever. On Friday, the October jobs report comes in. Oh, and we’re still in the heart of earnings season, with Apple (AAPL) being the headliner on Thursday. Spooky season indeed!

So, I’ll prepare the Stock of the Week portfolio the same way I’m preparing my house for the 300-400 trick-or-treaters who are likely to show up on my doorstep tomorrow night: protecting against the worst-case scenario. On Halloween, that means buying WAY too much candy, just in case it’s 500-600 kids this year (we live in one of Vermont’s most heavily trafficked trick-or-treating neighborhoods); in our portfolio, that means selling out of a couple laggards and adding a well-known retailer that’s actually in an uptrend.

Mike Cintolo recommended this retailer in Cabot Top Ten Trader last week, in fact. Here’s what Mike has to say about it.

American Eagle Outfitters, Inc. (AEO)

In what can only be described as a challenging environment for U.S. clothing retailers—characterized by a rash of smash-and-grab thefts in retail stores nationwide—American Eagle has managed to maintain growth while boosting profit margins as consumers gravitate toward higher-end apparel offerings. The company offers on-trend clothing, accessories and personal care products under the American Eagle (specializing in denimwear) and Aerie (lingerie and activewear) brands through nearly 900 store locations worldwide. The firm’s latest quarterly report in early September had more than a few encouraging nuggets. Although total Q2 revenue of $1.2 billion was essentially flat from a year ago, it improved 11% from the prior quarter and set an all-time high for the second quarter, with store revenue rising 4%.

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. By segment, Aerie sales of $380 million increased 2% while American Eagle sales of $767 million were up 1%. But the main reason for the strength isn’t an out-and-out growth story but a return to normalcy when it comes to earnings, thanks to cost controls, inventory management and a normalization of supply chain shenanigans from the past few years—despite so-so revenue tallies, per-share earnings of 25 cents in Q2 improved an eye-opening 21 cents from a year ago while beating estimates by 60%. The company touted its continued focus on maintaining inventory discipline, posting a 7% total inventory decline with units down 11%, and management said the profit improvement focus is expected to yield even more positive results over the next 12 to 24 months. Looking ahead, expect modest sales improvement and, while 2024 earnings estimates are mundane, many are likely looking for more bottom-line beats, which makes the already-modest valuation even more appealing.

As for the stock, AEO topped out in June 2021 and slid almost continuously until last October, surrendering about 75% along the way. There was a solid rally after that, but shares petered out in February and ended up retesting the low near 10 in May. Since then, though, it’s been all good—AEO shot back to slightly higher highs in September, and perhaps more encouragingly, its dip that month led to a strong bounce to higher highs despite the market. Everything is a toss-up in this environment, but if you want in, you could nibble here with a stop a few dimes under the 50-day line.

Current Recommendations

Changes Since Last Week:

AdvisorShares Pure U.S. Cannabis ETF (MSOS) Moves from Buy to Sell
Tesla (TSLA) Moves from Buy to Hold
Tractor Supply Company (TSCO) Moves from Hold to Sell

Two more sells this week. Tractor Supply completely fell apart on earnings, accelerating its recent downtrend. And the MSOS took a major hit along with the entire cannabis sector after the House of Representatives chose a decidedly marijuana-unfriendly new speaker. Tesla, meanwhile, is back below 200 a share as of this writing, so we’ll bump it down to Hold until the hand-wringing over its weak third-quarter subsides (it will).

Most of our other stocks held up well – Krystal Biotech (KRYS) and ServiceNow (NOW) were true standouts, rising sharply for different reasons, while Microsoft (MSFT) reported a strong quarter. So, with the addition of American Eagle, our portfolio now stands at an even 20 stocks. The fact that we haven’t had to trim it further than that amidst all the selling these last three months means we’re probably faring better than most right now.

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

Updates

AdvisorShares Pure U.S. Cannabis ETF (MSOS), originally recommended by Michael Brush in Cabot Cannabis Investor, has completely collapsed, falling from highs above 9 in the middle of September to just above 5 a share now. We got in around the midpoint of that decline when the fund appeared to be holding support in the 7 range. But it dipped below that support last week and fell like a stone this week. Given the many potential short-term catalysts in the cannabis sector – rescheduling to a Schedule III drug gaining approval from the Drug Enforcement Administration (DEA), major states like Ohio and Florida inching closer to legalization, the Senate possibly approving the SAFER Banking Act (though the House is even less likely to do so now that it has elected far-right Republican Mike Johnson as its speaker, which was a big reasons cannabis stocks fell hard in the last week) – it’s very possible selling now could be a mistake, as it was in late July when we sold our MSOX position a month before cannabis stocks took off and that leveraged cannabis fund more than doubled in two weeks. But the losses are simply too large to stomach right now, with no end in sight. So, it’s time to sell. MOVE FROM BUY TO SELL

Alibaba (BABA), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has held mostly steady in the 83-84 range. Early returns on the Chinese e-commerce giant’s Singles’ Day (November 11; China’s version of Cyber Monday, essentially) presales have been quite good, Carl noted in his latest update. “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 good news is that a recovery in consumer spending in China may be underway and shares trade at a cheap valuation of less than 10 times this year’s consensus earnings estimate.” 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 44% upside to Bruce’s 14 price target. The 8.1% 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, continued its post-earnings decline, dipping to 91 from 94. 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. We downgraded to Hold last week and will keep it right there in the hope that this “Bull Market Stock” (Mike’s term) gets going if and when the market picks up. 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. HOLD

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was down another 3.5% this week as its proposed deal to buy VMWare (VMW) came under new threat by Chinese regulators. However, the $69 billion acquisition appears to be back on track, and may close by the end of November instead of the end of October, as originally thought. If approved, the VMWare deal would greatly enhance Broadcom’s artificial intelligence profile – which is a big reason the stock is up 49% year to date. BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was unchanged this week but is up in early Monday trade after reporting record third-quarter earnings. Net profit 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. While not the 145% profit increase the Chinese EV maker experienced in the second quarter, 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% (see below). 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, fell below 43 support, dipping all the way to 39 before recovering to 40 today, despite beating earnings and revenue estimates last week. Sharp drops in both cable and broadband subscribers were what turned investors off, it appears. The company lost 490,000 cable customers in Q3 – fewer than analysts expected. But the big no-no was the 18,000-customer decline among broadband users – way off analysts’ estimates of a 10,900-customer gain. CMCSA shares – steady through much of the recent selling after a stellar first half of the year – finally caved, falling 8% last Thursday alone. While below their 50-day moving average, shares are still well clear of their 200-day line, so there’s no need for panic. In fact, this sharp decline looks buyable if that 39 floor holds in the coming days/weeks, and given the strong overall earnings numbers thanks to 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 still have a 25% gain on the stock, not including the dividend (2.9% yield). BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, is down about 2.5% since we last wrote, a rare down week for the stock. In his latest update, Mike wrote, “CrowdStrike (CRWD) is one of many resilient stocks that the bears have come around for in recent days, though big picture, the damage has been reasonable—CRWD is still hanging around its 25-day line, which is obviously miles stronger than most everything out there. We continue to think the stock is primed for good things if the market can stabilize; in fact, in a bullish scenario, we could quickly average up if CRWD pops higher as the market turns up in a meaningful way.” BUY

DraftKings (DNKG), originally recommended by Mike Cintolo in Cabot Growth Investor, dipped below 27 support, but hasn’t strayed too far, hovering in the mid-26 range. In his latest update, Mike wrote, “DraftKings (DKNG) has also come under the knife, dipping back to its August lows—that’s still stronger than the market (even the S&P 500 is about 5% below its August low), though nobody is going to argue the stock is strong, either. One analyst just upgraded shares this week, saying he expects a very solid Q3 report (due November 2), and the mid-November Analyst Day could bring some medium-term (two- or three-year) forecasts from management about EBITDA and profitability. If you have a full-sized stake, you could consider shaving some off here—but we’ve been riding with a half-sized position for months, so with the stock near some support, we’ll hold today.” We will keep on Buy ahead of this Thursday’s earnings report, though a dip below August lows (26) could have us moving to Hold. BUY

Dynatrace (DT), originally recommended by Tyler Laundon in Cabot Early Opportunities, was off about 4.5% in its first week in the portfolio. There was no news, so it was likely in sympathy with the broad market selloff last week. Fortunately (perhaps), the company reports earnings this Thursday, November 2. Analysts are looking for 26% revenue growth with 18% EPS growth. The company has beaten estimates by double digits in each of the last four quarters. A similar beat this week could help quickly right the ship. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, also reports earnings this Thursday, November 2. Shares have been in steady decline ahead of it, along with the market, after hitting all-time highs above 615 in mid-October; it’s down 8% in the two weeks since. Tom isn’t worried, as he wrote in his latest update: “The stock has been bouncing around in the past couple of months but on an upward trend. It tends to pull back a little off the high and then turn around and make another new high. Investors are unlikely to sour on LLY because it has two potential mega-blockbuster drugs up for FDA approval this year as well as stellar earnings growth for the next several years.” We’ll keep the rating at Hold until the earnings report passes, but another positive quarter could have us moving back to buy, especially after the recent stock dip. HOLD

GitLab (GTLB), originally recommended by Tyler Laundon in Cabot Early Opportunities, broke below recent support at 42, but has recovered nicely the last two trading sessions. With a revenue growth rate higher than 30%, we’ll hang on and see where it goes from here. HOLD

Krystal Biotech (KRYS), originally recommended by Tyler Laundon in Cabot Early Opportunities, was – get this – up 4.5% this week! There was no news, other than that the company will report earnings on November 6. Those could be pretty good, according to Tyler: “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, held steady ahead of earnings this Wednesday, November 1. Analysts expect 8.2% revenue growth with 1.2% EPS growth. The company has beaten earnings estimates for three quarters running. We’ll see what happens. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, got a nice bump after reporting earnings last Tuesday, rising about 2% since we last wrote. Here’s Tyler with the details: “Microsoft (MSFT) reported yesterday afternoon and crushed it (again) in the last quarter as Azure growth reaccelerated and margins expanded, largely thanks to AI-based solutions. 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. Shares are up today, as they should be, even in a down market. Keeping at buy, though given the action out there no rush to load up today.” BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, is down a point, from 97 to 96, since we last wrote, though momentum remains for its diabetes/weight loss drugs. As Carl noted in his latest update, “The company indicated one of its diabetes treatments could also be used to treat chronic kidney disease. Novo’s Ozempic and another drug, Wegovy, both contain semaglutide, which regulates blood sugar and insulin. It also reduces appetite and causes the stomach to empty more slowly, so that a person feels fuller faster.” The company is expected to report earnings this Thursday, November 2. Analysts anticipated 21% revenue growth with 58% EPS growth. BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down about 1.7% in the last week. In his latest update, Mike wrote, “NTNX took a steep dip but remains above its 50-day line, unlike 85% of stocks out there, and there’s little doubt demand for its offerings will drive recurring revenue and free cash flow nicely higher from here.” BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, reported earnings and they were excellent. Revenue climbed 25% (to $2.29 billion) in the third quarter, while earnings jumped 49% year over year to $2.92 per share. As a result, the stock is up more than 6% since the company reported earnings after the bell last Wednesday. We are now back in the black on this stock; a push above October highs (568) would be bullish. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is having a hard time shaking off the stink of its weak third-quarter report, dipping below 200 a share for the first time since May. Shares are also now below their 200-day moving average. As a reminder: 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. With the 200-day line falling by the wayside, let’s downgrade to Hold until TSLA can reverse the recent trend – likely once investors have some distance from the Q3 report. MOVE FROM BUY TO HOLD

Tractor Supply Company (TSCO), originally recommended by Tom Hutchinson in the Dividend Growth Tier of Cabot Dividend Investor, reported earnings that beat estimates, but revenues fell short, sending shares plummeting – they’re down 5.7% since last Thursday’s report. With no bottom in sight, and our losses moving into the teens, let’s step aside from this retail stock to make room for our new one (AEO) – and free up more dry powder for when the market finally gets its act together. MOVE FROM HOLD TO SELL

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, remains in the 42 range ahead of earnings November 7. In his latest update, Mike wrote, “We still think the story here is very much intact—management was talking very bullishly just a few weeks ago about the major business lines and newer ventures—but we’re going to trim a bit more given the action, selling one-third of what we have left and holding the rest.” With a 25% gain, and the stock still holding well above its 200-day line, we’ll keep it at 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 November 6, 2023.