Cabot Stock of the Week Issue: October 9, 2023

Stocks have been surprisingly resilient of late in the face of renewed conflict between Israel and Palestine, a newly Speaker-less U.S. House of Representatives, Treasury bond yields at 16-year highs, ongoing hawkish rhetoric from the Federal Reserve, etc. This week the market will be put to the test again as the September inflation number comes in and third-quarter earnings season gets underway. Would disappointing results on both fronts send stocks tumbling to new second-half lows? Or is the worst behind us and most bad news is already baked in? We may know the answer by week’s end.

I am still choosing to believe that the worst is (at least mostly) behind us, even if there’s another temporary leg down. And the market’s ability to absorb big blows, like last week’s way-better-than-expected jobs report (better is “bad” in this Fed-dominated environment), seem to support my thinking. There are signs of life in the market, as it seems the bears may be running out of ammo. So today, we add a stock that’s clearly been drawing interest from buyers of late, to the point where it’s gotten the attention of several of our Cabot analysts. One of the first to pick up this stock’s scent was Mike Cintolo, who just recommended the stock to his Cabot Top Ten Trader audience.

Here it is, with Mike’s latest thoughts.

Nutanix (NTNX)

Over the past decade, the rise of subscription business models has become the norm—while it’s been a bit annoying in real life trying to keep up with the endless monthly bills for this and that, for investors, it’s been a good thing, increasing the reliability of results (higher renewal rates when billing monthly or quarterly than big one-time upsells), which in turn attracts more big investors willing to build big positions.

Of course, many firms these days start with this business model (think cloud software), but others transition from the upgrade/upsell model to subscriptions; Adobe was the first big winner to do this years ago, leading to outstanding results. The only issue is that the transition can mess with things for a while—gone are the big one-time payments, leading to a temporary drop in profits that can persist for a couple of years, opening up the firm to risk. But if all goes well, the long-term profit profile is boosted … and the stock usually responds.

That longwinded intro is one of the big reasons why Nutanix (NTNX) is looking like a fresh leader of any market upmove that develops from here, allowing it to keep more customers for longer while costs fade and cash flow grows. (More on that in a second.) The other main factor, of course, is the business itself—while Nutanix’s offerings and technology can give you the proverbial ice cream headache, overall story is easier to understand: The company has a broad platform that can power all of a client’s IT infrastructure, meaning any apps, data and workloads, including the now-in-vogue AI and machine learning workloads. And it lets these clients move all of these between different clouds and environments; as Nutanix’s top brass says, they have one software platform for all apps and data, everywhere.

The result is that every system is operating where it “should” and for much lower costs, with independent studies showing a whopping 43% lower total cost of ownership over a five-year stretch and a payback of just one year. Given that Nutanix was one of the early pioneers of this movement years ago, and that’s the reason it has a massive client base of 24,550 (up 9% from a year ago), including a ton of giant ones (2,183 pay north of $1 million annually, including 359 that pay north of $5 million annually).

When you combine these two things—a best-in-class platform that’s seeing growing demand (with AI workloads likely to accelerate things) and the transition to a subscription model—you have a recipe for rapid, reliable growth for a long time to come. Indeed, metrics have perked up in a big way, and at last week’s Investor Day, Nutanix revealed some very bullish longer-term targets, expecting total revenue to lift 75% during the next five years, recurring revenue (which was up 30% in Q2) to double while free cash flow quadruples! Obviously, longer-term forecasts are to be taken with a grain of salt, but it’s worth noting Nutanix released some goals two years ago and easily surpassed those on all metrics.

The stock is certainly acting like it anticipates good things: NTNX had a huge off-the-bottom rally in the second half of 2022, then spent the first eight months of this year etching a tightening base. The breakout came after earnings on September 1, and shares held up well in the few weeks that followed—and are perched near their highs even as the market has had a rough go of it. That bodes well for when the market’s arrow turns up again; I think it’s buyable right here.

Current Recommendations

Changes Since Last Week:

Terex (TEX) Moves from Buy to Sell
Zillow Group (ZG) Moves from Buy to Hold

We have one more sell this week, as Terex (TEX) has fallen below key support. With the addition of Nutanix (NTNX), that means we’re holding firm at 21 stocks. A couple others are possibly on borrowed time – Zillow Group (ZG), namely, which we’re downgrading to Hold this week. Most of our stocks, however, have weathered the recent storm well; a few have thrived, especially CrowdStrike (CRWD), which is one of the precious few stocks out there hitting new 52-week highs!

Let’s get into what’s happening with all of them.

Updates
Our newly added AdvisorShares Pure U.S. Cannabis ETF (MSOS), originally recommended by Michael Brush in Cabot Cannabis Investor, had a rough first week in the portfolio, falling from 8 to 7. The fund, however, appears to have stabilized in the last couple trading sessions, so perhaps 7 will act as a floor, especially if the market can finally get off its knees. There was no major news impacting the cannabis sector, so the recent weakness is likely both in sympathy with the broad market drawdown as well as a natural pullback for cannabis stocks following the huge run-up in the first half of September. Between the FDA’s decision to recommend cannabis be rescheduled from a Schedule I to a Schedule III drug (which would require final approval from the DEA), and the SAFER Banking Act, which would give cannabis companies legal access to U.S. banks, gaining momentum in Congress, there are real tailwinds in the cannabis sector for the first time in a couple years. We just missed the late August/early September explosion in cannabis stocks after selling out of previously recommended MSOX. I don’t want to miss the next one, so this position may require some patience – and a strong stomach. BUY

Alibaba (BABA), originally recommended by Carl Delfeld in his Cabot Explorer advisory, fell from 86 to 84 since we last wrote. The only news is that Belgian authorities are investigating Alibaba for espionage due to its curious presence at an airport in the city of Liege. A Belgian security service said it was working to “detect and fight against possible spying and/or interference activities carried out by Chinese entities including Alibaba.” For its part, Alibaba denied the accusation. Not sure what’s going on there – and I don’t think it has a thing to do with whether or not Alibaba is a good investment. But, the unflattering news may have had something to do with BABA’s slight pullback this week. The Chinese e-commerce giant is still on track for $9.00 in EPS this year, and the stock remains a good value play on China’s recovering economy. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, gapped up to 10 from 9, rising about 7% since we last wrote. There was no news. Shares of this U.K-based life insurance and investment management firm still have 40% upside to Bruce’s 14 price target. We are now back to break-even on the stock. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is down about 2.5% in the last week, but appears to have found support at 103. There was no news. Earnings are due out October 19, and expectations are modest: Analysts expect both revenues and EPS to be down slightly year over year. But the company has beaten earnings estimates in each of the last four quarters, so perhaps those estimates are again overly pessimistic. This being what Mike calls a “Bull Market Stock,” what will really get shares going again is when stocks start to point upward for the first time since July. I think that will happen soon. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, had a good week, advancing nearly 2%. While shares are well off their late-August peak (922), Tom notes that “artificial intelligence gives the company a huge growth catalyst going forward, and it isn’t going away.” It’s already been a big boost, with shares up 51% year to date. BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, dipped just below 60 support last week, and remains in the mid-59s as of this writing. In his latest update, Carl wrote, “The company sold 431,603 fully electric vehicles in the three months ended Sept. 30, up 23% from the second quarter. Tesla shipped 435,059 cars globally in the quarter; the 3,456 car gap between the two EV makers is the narrowest yet. BYD has sold 2 million EVs so far this year and remains confident of selling 3 million EVs in 2023, which is about the total number of EVs sold in America over the last decade.” Trading at a mere 20 times forward earnings estimates – with 145% earnings growth over the last 12 months – this stock is woefully undervalued. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, lost a point this week, dipping from 44 to 43, its lowest point since July. There was no news. We still have a 37% gain on shares of this very reliable, dividend-paying media giant. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, is our hottest stock, and one of the very few in the market actually hit 52-week highs! Mike explained why in his latest update: “With 90% of stocks below their 50-day lines and broader indexes looking awful, there’s nothing much at all that’s truly ‘strong’ in this market. But CRWD is fighting the good fight, testing new high ground (and it did register an RP peak) on Monday before falling back; overall, the stock’s been etching higher lows during the past few weeks, in contrast to the major indexes and most stocks and sectors. Of course, good stocks can go bad in a hurry in bad markets, so we’re not complacent, but it’s hard not to be encouraged, especially given the fact that the top brass only recently upped its longer-term model, essentially saying it expects to be far more profitable than previously thought in the years ahead even as top-line growth remains solid. We’re trying to give CRWD room to slosh around here given the resilience—we’re holding onto our half-sized stake. And if you aren’t yet in (and have plenty of cash in your portfolio), we’re not opposed to picking up a few shares on the current dip.” Since that update last Thursday, CRWD did break to new high ground and then some, blowing past previous highs at 172 to reach 181 as of this writing – and it’s still climbing. With an 11% gain in just a month – a month in which nearly every other stock is down – CRWD is our strongest current performer, and one of the strongest stock on the market. BUY

DraftKings (DNKG), originally recommended by Mike Cintolo in Cabot Growth Investor, was flat this week and remains in a range between 27 and 29. In his latest update, Mike wrote, “DKNG continues to thrash around, and two or three more points on the downside could damage the chart and have us selling and holding the cash. But, despite the volatility, the stock has been hitting higher lows since August, and is one of the names out there that if it sees a few good days (a big ‘if,’ of course), it wouldn’t be far from a legitimate breakout. In the meantime, all signs are that business remains in good shape—in fact, the Taylor Swift/Travis Kelce hookup has drastically boosted online prop bets on Kelce (a tight end for the Kansas City Chiefs) the past two weeks, while opening for business in Kentucky late last month should help the cause as well. The bottom line is that the story and numbers are there for a sustained rally after the past two months of base building, but we have to see if the market will allow DKNG to get moving.” BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, had a very nice bounce-back week, rising more than 7% to recover more than half its recent losses. One catalyst behind the rebound was its $1.4 billion purchase of Point Biopharma (PNT) in a deal that should bolster its cancer drug business. Point is working on radioligand treatments for cancer. It ties a radioisotope to a molecule capable of finding cancer cells in the body, allowing the drug to deliver targeted radiation directly to the tumor, limiting the impact on healthy tissue. We now have a 73% gain on the stock in just over six months – and yet it trades well below its early-September highs around 600. BUY

GitLab (GTLB), originally recommended by Tyler Laundon in Cabot Early Opportunities, held firm in the 45-46 range this week – a good sign after the stock bounced off 42 support the prior week. There’s been no news for this software developer. HOLD

Krystal Biotech (KRYS), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up about 2% this week on no news. 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%). BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, ticked up a little more than 2% and has been in recovery mode the last two weeks. There was no major news affecting the company. Earnings are due out later this month. Microsoft remains one of the leaders of the artificial intelligence boom thanks to its ChatGPT and Bing platforms. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, is flat in the last week. In his latest update, Carl wrote, “The market for Novo’s twin drugs used to aid weight loss is predicted to skyrocket to $100 billion by 2035, according to BMO Capital Markets. 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.” Those are pretty good reasons to invest in the maker of Ozempic and Wegovy. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, was up very slightly in the last week on no news other than the company will report third-quarter earnings on October 25. We are roughly break-even on this big-cap cloud computing stock with an AI tilt. 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. 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, though it’s testing the low end of that range today. 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, just isn’t doing it for us anymore. The stock fell below 55 support last week and has dipped all the way to 52, right at its 200-day moving line. With about a 10% loss on this construction and infrastructure play, let’s step aside now and make room for a new opportunity when the next big leg up arrives. MOVE FROM BUY TO SELL

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up another 2% this week, and has recovered about half its late-summer losses. The stock is down in trading today, however, after the company reported an 11% year-over-year decrease in its China sales. The success of BYD (see above) is eating away at Tesla’s Chinese market share, despite the company’s efforts to lower costs. Overall, deliveries improved 26% year over year in the third quarter to 435,059 – though that number was well shy of Wall Street estimates of 461,640 deliveries, and down more than 6% from the second quarter. We’ll have a more full picture of Tesla’s third quarter next week, when the company releases earnings on October 18. In the meantime, there’s been plenty of good news propping up shares: The company launched a Model Y RWD with a base price of $43,990, and buyers would be eligible for the $7,500 U.S. tax credit for EV purchases. Tesla bulls are betting on a fourth-quarter rebound in deliveries with the revamped Model 3 in China and the expected Cybertruck delivery launch, plus 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, held support in the 202-203 range, which is giving it a stay of execution in our portfolio (we downgraded to Hold last week). In his latest update, Tom wrote, “The farm and ranch company stock has been getting slapped around as investors are worried about the continued resiliency of the consumer. But Tractor’s rural consumers have already been weak for a while and the company has been successfully compensating with its vast array of staple products. Last quarter, the company delivered 8.5% EPS while average S&P 500 earnings were down. TSCO should be solid in just about any environment with a low beta and a highly resilient product base.” HOLD

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, keeps holding in the 44-to-46 range. In his latest update, Mike wrote, “UBER remains tedious, getting nailed periodically when the market sells off, but so far, it’s another one of our names that’s been etching higher lows for a while. While there hasn’t been much from the company in recent days, management’s bullish tidbits about business (relayed during some conferences in September) certainly helped investor perception and boosts the view that official EBITDA and free cash flow targets (released many quarters ago) should prove conservative in 2024.” BUY

Zillow Group (ZG), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down another 5% last week, prompting Tyler to sell the stock early last week. However, shares seem to have stabilized in the 41-42 range since then, and our losses (about 13%) are more modest than Tyler’s were, so let’s simply downgrade to Hold for now, in the hope that the low has been put in already. MOVE FROM BUY TO HOLD

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 16, 2023.