Cabot Stock of the Week Issue: September 11, 2023

As expected, Wall Street returned from its collective summer vacation last week and commenced its usual early-September selling. Fortunately, the damage has been limited – the S&P 500 is down less than 1% after some nice bounce-back Friday and today. The market wants to go up after a new bull phase emerged in the first half of the year. This week’s inflation data – August CPI comes out Wednesday – could always throw a wrench into things, and anytime a Federal Reserve member opens their mouth it’s liable to send stocks down a percentage point or two. But those are speed bumps. The market’s car is headed higher in the coming months, and this late-summer choppiness will soon look like a pit stop.

Speaking of struggling markets … China. To some, it’s untouchable given its sluggish growth coming out of Covid lockdowns, flailing housing sector, high youth unemployment (north of 20%), tensions with the U.S. and other major global economies, etc. But Chinese stocks have been overly punished, with the Invesco Golden Dragon China ETF (PGJ), which tracks the price of Chinese ADRs (American Depositary Receipts), trading at roughly a third of its February 2021 highs. And that “sluggish growth” was 6.3% Q2 GDP growth – three times U.S. Q2 growth, and China’s best quarterly expansion in two years. China’s economy, while not the immediate boom some forecast once lockdowns were lifted, is nevertheless recovering. Its stocks have lagged. And that spells opportunity.

So today, we go to China for one of its very biggest brand names, which Carl Delfeld added to his Cabot Explorer portfolio last week. Here it is, with Carl’s thoughts.

Alibaba (BABA)

Alibaba is one of China’s most well-known brands and the country’s largest e-commerce company. The stock got knocked down over the last few years thanks to a heavy political hand by the Chinese government and a sluggish consumer economy.

The shares are now selling at a cheap valuation that barely prices in any future growth, which seems unrealistic given all the opportunities for this tech giant to grow beyond its massive consumer platform. Cloud computing and artificial intelligence (AI) are just two examples.

A great majority of Alibaba’s revenue from retail comes from marketing services and other fees charged to merchants, but the transaction values from Taobao and Tmall make up half of China’s e-commerce market. After seeing revenue for the commerce group dip 3% in the fiscal year ended in March, Taobao and Tmall reported double-digit growth in the last quarter, indicating a strengthening economy in China. Another growth area is the international digital commerce group, including results from AliExpress, where revenue surged 41% year over year last quarter.

Like Amazon, Alibaba has a web of businesses, including revenue streams from cloud services, entertainment and logistics. Alibaba basically facilitates transactions between buyers and sellers. The company is a huge data-gathering network, which is a competitive advantage and moat. It uses all the data gathered from communications and transactions across all its various business units to improve productivity and growth.

Importantly, Alibaba has announced it will split into six mostly independent pieces, with businesses such as logistics and smart retail set for initial public offerings.

Its cloud business is a thriving operation and China’s closest comparison to Amazon Web Services. Founded in 2009, the business known as Alibaba Cloud provides data processing and storage services to thousands of businesses, developers, and government organizations in more than 200 countries and regions, according to its website. It contributed $11.2 billion of revenue to Alibaba in the 12 months ended March 31, excluding payments from other businesses within the group.

Last month, Alibaba opened its own artificial intelligence model to third-party developers, as the Chinese e-commerce giant aims to increase the use of its product and take a leading role in technology.

The move pits Alibaba against U.S. tech giant Meta which has made a similar move, and both pose a potential challenge to OpenAI, the firm behind viral AI chatbot ChatGPT.

Alibaba stock’s forward price-to-earnings ratio is about 10 which is starting to attract attention. Considering that the cloud business reported a 106% year-over-year increase in adjusted operating profit last quarter, Alibaba might be on the verge of a long stretch of profitable growth over the next decade. Investors are getting a bargain on one of the world’s leading technology firms.

This is a contrarian recommendation in a high-quality company selling way below its high and presents us with attractive upside potential despite all the concerns regarding Chinese economic growth.

Current Recommendations

Changes Since Last Week:
DoubleVerify (DV) Moves from Hold to Sell

Our portfolio holds at 20 stocks, as today we say goodbye to DoubleVerify (DV) after it fell sharply below key support. The rest of our stocks are behaving quite well, including ongoing rallies from Tesla, Blackstone, DraftKings and ServiceNow, to name a few. But the two big winners – both of which are hitting all-time highs – are a pair of giant pharmaceuticals: Eli Lilly and Novo Nordisk. We now have at least 50% gains in both stocks!

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

Updates

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, keeps holding in the mid-9s and has 47% upside to Bruce’s 47 price target. Shares of the U.K.-based life insurance and investment management company have been headed in the wrong direction for the past six weeks, but the 8.5% yield is a nice life raft until the stock can get in gear again. HOLD

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has truly broken out, hitting new 52-week highs above 114! Shares had pulled back to 96 during the early-August correction but have gone nowhere but up in the last three weeks. The fact that the stock continued rising last week even as the market pulled back – Blackstone is what Mike calls a “Bull Market Stock,” meaning it usually thrives when the market does – bodes well for both the stock and perhaps investors’ perception of the current market. We have a 9% gain on the stock since adding it to the portfolio at the beginning of August. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, continued its post-earnings decline, falling another 2.5% last week. As I wrote last Tuesday, Broadcom was the latest victim of this upside-down earnings season, where good stocks with good earnings got sold off after reporting. In his latest update, Tom wrote, “This past week was a rollercoaster for the AI juggernaut. The earnings report was the big catalyst. Past reports have been consistently stellar and AVGO soared to a new 52-week high ahead of the report. Earnings soundly beat estimates, but the company failed to raise guidance for the rest of the year. The stock fell over 4% the day of the report and gave up a lot of the earlier rally. Results were strong but the stock was priced for perfection, and not raising guidance is seen as an imperfection. But the stock still has a great outlook.” Most of our other stocks that got beat up on perfectly fine earnings in the past couple months have since bounced back, and I expect the same thing from Broadcom. So, I’ll keep it at Buy. BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was mostly steady this week. The latest news, as Carl wrote in his update last Thursday, is that “BYD now supplies batteries to Tesla, making the two rivals and frenemies. China’s top-selling EV maker boosted headcount by over 50% to more than 630,000 in the 12 months to June and hired around 31,800 graduates in 2023, with more than 80% of them hired for research and development. BYD remains confident of selling 3 million EVs this year despite economic challenges and an intense EV price war.” BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, held firm around 45, a consistent area of support. There was no needle-moving news, although the company is in talks with Disney about what to do with Hulu, the streaming service they jointly own. The two sides plan to negotiate a sale of Comcast’s minority stake in Hulu on September 30 – months earlier than the initial January 2024 date. Home to popular shows such as “The Bear” and “The Handmaid’s Tale,” Hulu is worth more than $30 billion and has 48.3 million subscribers as of July 1; Comcast owns one-third of the business, Disney the other two-thirds. Something to keep an eye on in the coming weeks, especially once September 30 rolls around. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, had a very nice debut, rising nearly 4% to hit new 2023 highs in its first week in the portfolio. In his latest update, Mike wrote, “We’ve been following CrowdStrike for years, as the firm’s ever-broadening cybersecurity platform continues to attract giant clients and produce excellent growth. And while earnings and free cash flow have been strong for many quarters, margins are now leaping far above expectations—the firm thinks it will achieve a 30% free cash flow margin this year, nearly up to its long-term goals (30% to 32%), which means profitability could end up being much larger down the road than expected. The stock had been basing in a sideways pattern for four months but popped to the top of that range after earnings last week—we bought a half-sized position (5% of the Model Portfolio) and will look to average up if the market improves and CRWD continues to act well.” BUY

DoubleVerify (DV), originally recommended by Mike Cintolo in Cabot Growth Investor, has fallen below 31 support, and it’s time to sell. Mike sold the stock recently as well; here’s what he wrote about it: “We still think DoubleVerify’s long-term story is solid, but there’s no question that big investors disagree—the stock is broken and wasn’t able to bounce much before another wave of selling hit it in recent days. (The fact that its closest peer, Integral Ad Sciences, IAS, acts similarly confirms the picture.) Maybe DV can repair the damage over time, but that will likely take a couple of quarterly reports and, of course, a better market. But near term, it’s not in position to be a leader and could fall further if something pops up. We sold our remaining shares on a special hotline earlier this week.” We’ll follow suit today. MOVE FROM HOLD TO SELL

DraftKings (DNKG), originally recommended by Mike Cintolo in Cabot Growth Investor, has recovered nearly all its August losses, tacking on another 7% since we last wrote. A move above previous highs in the 32 area would be very bullish. Here’s what Mike had to say about it in his latest issue: “At heart, we’re optimistic, as DraftKings is the leader, and the sports betting industry, while still having great potential, isn’t in the land-grab phase anymore, so top brands aren’t easy to displace.” BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, broke to new all-time highs yet again! A U.K. health care watchdog gave Mounjaro, Lilly’s signature diabetes drug, its stamp of approval as an effective tool for patients with poorly controlled type 2 diabetes. As many as 180,000 people could benefit from the ruling, according to the National Institute for Health and Care Excellence (NICE) – meaning more potential customers for Eli Lilly. As a result, the stock tacked on another 6.5%. We now have an 80% gain on LLY in five and a half months! As I’ve written in recent weeks if you bought shortly after our late-March recommendation, now is the time to ring the register by selling about a quarter to a third of your position, and letting your remaining shares ride. LLY has been unstoppable and just keeps rising higher. But I wouldn’t recommend new buys at these levels even after the big news from the U.K. HOLD

GitLab (GTLB), originally recommended by Tyler Laundon in Cabot Early Opportunities, reported fiscal second-quarter 2024 earnings last Tuesday, and they were good enough to send the shares back near their July highs. Revenue improved 38% year over year and beat estimates by more than 7%, while non-GAAP earnings came in at one cent per share, up from a 15-cent loss a year ago and ahead of the 3-cents-per-share loss analysts were expecting this quarter. Customers with more than $5,000 of Annual Recurring Revenues (ARR) jumped 33% year over year, while customers with more than $100k in ARR increased 37%. GitLab provides a source code management (SCM) platform with a host of collaboration, sharing and tracking tools for software developers. We have about a 5% gain on the stock, and now it has momentum again. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, continued its steady recovery from the August pullback, advancing another 1% since we last wrote. There was no major news regarding the company. Artificial intelligence fever spiked again in recent weeks in the wake of another blowout quarter from fellow AI leader Nvidia, which has likely helped boost MSFT shares. But Microsoft’s AI position – with ChatGPT/the Bing search engine – isn’t dependent on Nvidia’s success, which is one of many reasons this is a great time to buy it while the stock is still about 6-7% off its mid-July highs. BUY

Neo Performance Materials Inc. (NOPMF), originally recommended by Carl Delfeld in Cabot Explorer, gave back much of its gains from the previous week, but the stock largely remains in the 6s – where it’s been since March. Neo manufactures advanced tech and industrial metals and materials such as magnetic powders and magnets, specialty chemicals, metals, and alloys. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, just keeps hitting new all-time highs! Now up to 200 a share for the first time, Novo has become Europe’s most valuable company based on market cap. In his latest update, Carl wrote, “The pharmaceutical giant has had a strong year thanks to its hugely popular diabetes and weight loss drugs, Ozempic and Wegovy, respectively. Last month, Denmark-based Novo Nordisk reported that profits surged 43% in the first half. On Tuesday, the company launched Wegovy in the U.K., further boosting its stock.” The stock is now up 50% from our entry point, which means – as with LLY (see above) – it’s a good time to book profits on a few shares if you got in early after our late-December recommendation. I’d keep new buys to a minimum – or on rare dips – but I’ll keep our rating at Buy for now. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, is threatening to break to new 52-week highs above 603. Like last week, there was no company-specific news; rather, it appears Wall Street has simply realized its mistake after selling off NOW following a very strong Q2 earnings report in August. Subscription revenues improved 25% year over year while operating margins came in at 23.4%. As with several names in our portfolio, AI is the driving force here, as the company plans to release several new workflow products with Generative AI built into them in the last few months of the year. The company says the new offerings could enable it to boost prices across its IT, customer service and human resources workflow products by as much as 60%. We now have an 8% gain on the stock, but if shares can close above 603 either today or later this week, they could go much higher. BUY

SI-Bone (SIBN), originally recommended by Tyler Laundon in Cabot Early Opportunities, is down slightly in the last week but is holding comfortably above 20 support. 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, gave back some of its recent gains and is trading right around the middle of its 55-to-65 three-month range. The company is a global manufacturer of materials processing machinery and aerial work platforms. It reported 30% revenue growth and 120% EPS growth in its most recent quarter. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to recover, up another 6% this past week. The latest catalyst is Dojo – a supercomputer that a Morgan Stanley analyst says could boost the company’s value by as much as $600 billion. Dojo enables self-driving car technology and would allow Tesla to expand into areas such as robotaxis and software services. The company started production on Dojo in July and will spend another billion dollars on it through the end of next year. Morgan Stanley analyst Adam Jonas says, if successful, Dojo could open up new markets for Tesla that “extend well beyond selling vehicles at a fixed price,” and he raised his rating on the stock to “overweight” from “equal-weight” and has set a price target of 400 – 47% higher than the current share price. BUY

Tractor Supply Company (TSCO), originally recommended by Tom Hutchinson in the Dividend Growth Tier of Cabot Dividend Investor, was flat for a second straight week since joining the portfolio. In his latest update, Tom wrote, “The farm and ranch company is a serious retail player. The company has a proven ability to consistently grow earnings and deliver on stock performance. Few retailers have grown earnings every year for 31 straight years. Last quarter, the company delivered 8.5% EPS growth while average S&P 500 earnings were down over 7%, and down for the third straight quarter. TSCO should be solid in just about any environment with a low beta and many products that are considered staples.” BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, had nearly recovered all its August losses after dipping as low as 43. In his latest update, Mike wrote, “UBER looks like most growth stocks, with a correction in July and early August and a rally back near the end of the month before sloughing off in recent days. The move by Instacart to file for an upcoming IPO could have some near-term effects on this stock, so that’s something to watch, but really there’s been nothing much new from the company or analysts since earnings—business is good for both its rideshare and delivery segments, EBITDA and free cash flow are very strong, sub-metrics like engagement are headed in the right direction, and many new ventures (Uber for business, bookings for delivery, ads on their app) and geographies (continued expansion in new markets) promise to keep things humming.” BUY

Zillow Group (ZG), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down a point this week, likely in sympathy with the market. There was no company-specific news. This is a play on the housing industry’s intermediate- to long-term recovery, which Jerome Powell said has already begun during his comments from Jackson Hole last month. 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 September 18, 2023.