Cabot Stock of the Week Issue: September 18, 2023

The stock market is boring right now. And to me, that’s a good thing.

Why? Because September is typically not a boring month for stocks – and that’s a problem. It’s historically the worst month on the calendar for investors, something we had been bracing for coming off a very strong summer. So the fact that the S&P 500 is down a mere 1.2% this September, and has been in the same range for the last three weeks, feels like a small victory. “Boring” is better than “bad.” And with the new bull market likely to resume its upward trajectory in the fourth quarter, the less damage done between now and then, the better.

Of course, the Fed will play a role in how much or little damage is inflicted, which makes Jerome Powell’s press conference this Wednesday critical once again. While the Fed is very unlikely to hike rates this month (the CME FedWatch tool places the odds at 99% that rates will stay the same this time), his words will carry a ton of weight depending on how dovish or hawkish (or both) he sounds. Stay tuned.

Just in case Powell tanks the market again, today we add a utility stock that pays a hefty dividend. Utilities have been the worst-performing sector on the market this year, so this is a low-risk play on a group that’s due for a rebound. But this is no ordinary, “boring” utility stock, as Tom Hutchinson, Cabot Dividend Investor Chief Analyst, writes.

NextEra Energy, Inc. (NEE)

Different stock sectors go in and out of favor all the time. Right now, utility stocks are in the dumps. It’s the worst-performing S&P 500 sector so far this year. There are a couple reasons for the poor performance. Interest rates are near a 15-year high. High rates bolster fixed-income alternatives. It’s also true that technology stocks have driven the market this year and investors haven’t been in a mood for defense.

But things change. Interest rates may be near the peak. The economy could slow later this year or next year. Sectors rotate. Technology stocks were the worst-performing sector last year and the best-performing this year. Nobody wanted energy stocks a couple of years ago. NEE is near a multi-year low price, and not because of operational performance, which has been solid.

NEE isn’t just some boring, stodgy utility stock with the possible benefit of good timing. It has a long track record of not only vastly outperforming the utility sector, but the overall market as well. Prior to this year, here’s how NEE’s total returns compared to those of the S&P 500.

How could a utility stock more than double the returns of the market over five- and 10-year periods? It’s not an ordinary utility.

NextEra Energy provides all the advantages of a defensive utility plus exposure to the fast-growing and highly sought-after alternative energy market. It’s the world’s largest utility. It’s a monster with about $21 billion in annual revenue and a $136 billion market capitalization. Earnings growth and stock returns have well exceeded what is normally expected of a utility.

NEE is two companies in one. It owns Florida Power and Light Company, which is one of the very best regulated utilities in the country, accounting for about 55% of revenues. It also owns NextEra Energy Resources, the world’s largest generator of renewable energy from wind and solar and a world leader in battery storage. It accounts for about 45% of earnings and provides a higher level of growth.

Investors love it because they get the safety and income of a utility and still get great growth and capital appreciation. It’s the best of both worlds. There is also a huge runway for growth projects. NextEra has deployed $50 to $55 billion in the last few years for growth expansions and acquisitions. It also has a large project backlog.

Since 2006, NextEra has grown earnings by an average annual rate of 8.4% and grown the dividend at an average rate of 9.8% per year. That propelled the market returns stated above. The company is targeting 10% earnings growth from 2021-2025 and 10% annual dividend growth through at least 2024. NextEra has a long track record of meeting or exceeding goals.

Utilities have historically been among the best stocks to own during times of a slowing economy or recession. It is highly likely that the economy will stumble in the next few quarters with interest rates near a 15-year high and consumer savings depleted.

Of course, the market doesn’t have to flounder for NEE to do well. It has historically been a solid performer in bull markets. It also is very much connected to the growth in clean energy, which should get a further boost with oil and gas prices on the rise.

NEE is down over 17% YTD and is trading near the lowest price in three years. Yet, everything that propelled the stock higher in the past is still firmly in place. In fact, things might be better in the future than they were in the past. Sure, the stock could flounder for a bit longer, but it is likely to be a lot higher in six months or a year regardless of what the market does.

Current Recommendations

Changes Since Last Week: None

No changes this week, which means – for the first time ever – this portfolio has 21 stocks. As I wrote in previous weeks, I’ve decided to loosen the reins on our strict 20-stock cap, mostly due to simple math: With about 50 new stocks added per year (give or take), limiting ourselves to no more than 20 at a time means having to sell out of some perfectly good stocks. While I don’t plan to have a portfolio of 50 (or even 40 or 30) stocks anytime soon, 25 seems reasonable given the potential for a next leg up of this nascent bull market by year’s end. Might as well give ourselves as many cracks at a big winner as possible … within reason. And to me, 25 seems like a reasonable limit. If we hit that limit over the next month or two, that will likely mean something has gone right with the market.

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

Updates

Alibaba (BABA), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was down a couple points in its first week in the Stock of the Week portfolio. The e-commerce giant – the Amazon of China, and a bargain play on China’s rebounding, overly maligned economy – just got into the artificial intelligence game with a product called Tongyi Qianwen, a large language model similar to Microsoft’s ChatGPT platform. In conjunction with its new AI platform, the company named a new head of its Alibaba Cloud division (Eddie Wu), who called AI the “most significant change agent” over the next decade. Throwing its hat into the artificial intelligence ring opens up a new world of potential revenue streams for a company that already expects to grow revenues by at least 9% in each of the next two fiscal years. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, got a nice bump on no news, with shares rising 5% to hit their highest point (10) since late July. We are back to breakeven on this U.K.-based life insurance and investment management company that still has 40% upside to Bruce’s 14 target price. HOLD

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, held its gains after breaking to new 52-week highs above 114 last week. That’s a good sign for this “Bull Market Stock” given that the market has been in a rut for about a month. The only news is that the company has decided to combine its credit and insurance groups into a single unit called Blackstone Credit & Insurance. That didn’t move the needle much for investors; a resumption of the kind of bull market buying we saw in June and July likely will. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, is off about 1% since we last wrote. The only real news was positive, as company director Check Kian Low bought $9.6 million of shares on the open market. Company insiders snatching up their own stock is always an encouraging sign. In his latest update, Tom wrote, “The AI juggernaut is off the high and has been bouncy of late. But it is still very much in the much higher range achieved after the spring surge. 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.” BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has been in the 62-to-65 range all month. A break above that range could mean the stock threatens its late-July highs above 71. But right now, shares appear to be in a holding pattern like many other stocks. In his latest update, Carl wrote, “BYD (BYDDY) shares gave back the point they earned last week as Europe tries to push back a bit on a surge of imports of Chinese EVs. BYD remains confident of selling 3 million EVs this year despite economic challenges and an intense EV price war.” This remains our highest-conviction long-term position, so I’d buy now before the stock breaks out of its current range. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, keeps holding in the 45-46 range. In his latest update, Bruce wrote, “Comcast and Disney are moving up the start of their negotiations to September 30 regarding who will buy the other’s Hulu stake and on what terms, sooner than the previous January 2024 starting date. Comcast owns a one-third stake and is expected to sell this stake to Disney, which owns the balance.

“At the Goldman Sachs conference last week, Comcast’s CEO Brian Roberts spoke reasonably convincingly about how well the company is positioned for the wind-down of linear television. Comcast has a strong and high-margin broadband business, based on their fiber and cable infrastructure to millions of homes and businesses, that will become more valuable as consumers switch to streaming and all users switch to more data-intensive applications. He described the linear TV business today as mostly a low-margin pass-through business. Most of the other businesses, including NBCUniversal, are doing well and were described as ‘growth’ businesses with a strong future.

“Roberts, negotiating in public, as it were, compared the value of Hulu’s #2 market share to the $200 billion value of Netflix’s #1 market share. However, Hulu’s negotiating value will be much lower than $200 billion but almost certainly higher than the $27.5 billion minimum value that is commonly mentioned. He said that much of the proceeds would be applied to share buybacks.

“All-in, we see the company’s broadband foundation as solid and increasing in value, despite the slide in the value of the traditional cable-TV business. The content side of Comcast looks reasonably solid except for the NBC and other linear TV programming due to its fading value to viewers and advertisers.

“Comcast shares fell 1% in the past week and remain roughly at our 46 price target. For now, we are keeping our Hold rating. The shares aren’t particularly cheap, but the fundamentals continue to remain sturdy.” BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, gave back basically all of its 4% gain from the previous week. There was no news. In his latest update, Mike wrote, “We reviewed many of CrowdStrike’s (CRWD) excellent numbers from the latest quarterly report, but one that showed up in the quarterly filing (10-Q) was that the firm’s contracts are generally non-cancellable and total one to three years in length—and the value of all the money it’s due going ahead (dubbed remaining performance obligations) was a whopping $3.6 billion, up 44% from a year ago, up 9% from the prior quarter and totaling nearly five times revenue in the latest quarter! The stock is off to a decent start for us, though we’d note the relative performance (RP) line is still testing its prior May peak. Combine that with the iffy market and we won’t average up here—but we’re OK starting a position here or on dips if you’re not yet in.” The dip this past week looks like a good buying opportunity. BUY

DraftKings (DNKG), originally recommended by Mike Cintolo in Cabot Growth Investor, has been in the 30-31 range since its nice recovery in late August and early September. Mike likes what he sees, as he wrote in his latest update: “DraftKings (DKNG) has rebounded about as well as we could have hoped after the ESPN-induced dive last month—in fact, shares actually nosed to a marginal new relative performance (RP) peak on a closing basis last week before backing off a bit, which is obviously a good sign the buyers are still active. One analyst thinks hold rates (how much a sportsbook keeps) could be down a touch from a year ago due to some unfavorable outcomes early in the football season so far, so we’ll see how that impacts Q3 numbers next month. But there’s little doubt the sports betting market is very strong, with one survey saying that 73 million U.S. adults will place bets during the 2023 NFL season, up from 27 million two years ago. Back to the stock, DKNG’s rebound is a great sign, but there’s still overhead to chew through and an iffy market to deal with. Thus, we’ll stay on Hold with our half-sized position for now.” Because we added the stock later than Mike – just over a month ago – we will keep it at Buy as it’s one of our favorite long-term positions. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, finally pulled back after hitting new highs again, giving back about 4% since we last wrote. Shares of this mega-cap biopharma were due for a pullback after months of going nowhere but up, which is why I advised in this space last week that selling a few shares if you got in early after our late-March recommendation would be a wise choice. We’re still up 73% on the stock in just six months and remain plenty confident in its long-term trajectory. But it was bound to hit a few potholes, especially in this sluggish market. Keeping at Hold. HOLD

GitLab (GTLB), originally recommended by Tyler Laundon in Cabot Early Opportunities, had a bad week, falling 7% after jumping nearly as much on earnings the previous week. Two company insiders – CFO Brian Robins and director Susan Bostrom – sold a combined 60,000 shares last week, which is a bit of a red flag, although a relative drop in the bucket considering the stock has 155 million shares outstanding. Something to keep an eye on, though. As for the earnings, they were good: 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. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down about 2.5% in the last week on no major news. The stock is still in the 328-338 range it’s been in all month. We still have a 28% gain in the stock in six months. After observing how the company applies its industry-leading AI to day-to-day operations during a conference earlier this month, Goldman Sachs analyst Kash Rangan rated MSFT shares a buy with a 400 price target, or 21% above the current share price. I agree – although I wouldn’t cap MSFT’s potential at $400! BUY

Neo Performance Materials Inc. (NOPMF), originally recommended by Carl Delfeld in Cabot Explorer, keeps holding in the 6.5 range. Carl noted in his latest update that some of the company’s resource product prices are under pressure. Still, it hasn’t weighed on the share price much, even though shares have been a bit stuck in the mud of late. 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, finally hit a snag, retreating more than 5% after touching new all-time highs near 200 a share when we last wrote. The company announced a two-for-one stock split, which will take effect this Wednesday, September 20 for holders of its American Depositary Receipts (ADRs) to bring them in line with its Class B shares, which it had previously split two for one. That likely wasn’t the reason behind the recent fall – rather, like LLY the stock was due for a pullback after surging to all-time highs. This morning’s news that the FDA deemed conditions “objectionable” at the company’s Wegovy plant in North Carolina has prompted some short-term selling, though I doubt it will impact shares for more than a day or two. We still have a 41% gain on the stock, though as with LLY, we advised selling a few shares last week with NVO hitting new highs. I hope you did so! Otherwise, it’s still a Buy. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, is down about 4% after hitting new all-time highs above 605 a week ago. There was no news. The stock continued a pattern of higher highs followed by higher lows that it’s been on all year, so the volatility is nothing new. In the aggregate, the results have been good, with shares up 50% year to date, and we still have a gain on it, so you just have to ride out these sharp retreats. 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%. BUY

SI-Bone (SIBN), originally recommended by Tyler Laundon in Cabot Early Opportunities, is up a point in the last week and is trading at the high end of its 20-to-23 range from the past six weeks. 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 flat since we last wrote, still trading right around the midpoint of its 55-to-65 range of the last three months. 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, was down about 2% this week, pausing after three straight weeks of gains. A Goldman Sachs downgrade contributed to the pullback as one analyst believes price cuts on certain models will continue well into next year, thus weighing on margins going forward. But as Carl Delfeld – who recently added TSLA to his Cabot Explorer portfolio – noted in his latest update, “Tesla currently makes vehicles at an estimated labor cost of $45 to $50 per hour, whereas the Detroit Big Three make vehicles for about $64 to $67 per hour, making ongoing UAW (United Auto Workers) labor negotiations critical. In further news, Tesla’s Dojo supercomputer could add up to $500 billion to its market value, according to Morgan Stanley, which raised their price target to $400 a share.” For those reasons and many more, I’m keeping TSLA at Buy despite what Goldman Sachs says. BUY

Tractor Supply Company (TSCO), originally recommended by Tom Hutchinson in the Dividend Growth Tier of Cabot Dividend Investor, was down about 3% this week on no news. TSCO shares are bumping up against 210 support. If it drops below it, we may downgrade to Hold. But for now, this safe, dividend-paying retailer remains a Buy. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, is down about 4% after threatening to hit new 2023 highs when we last wrote. Still, its recovery from the mid-August low of 43 has been encouraging, as Mike noted in his latest update: “Uber (UBER) … continues to round out a normal-looking launching pad. Fundamentally, its talk at an analyst conference last week helped the cause, with the top brass relaying many positive tidbits about business and the general outlook that we touched upon in last week’s issue. And, this past weekend, rumors surfaced that Uber might get into the handyman business, using its app to connect users and workers for tasks; it’s just a rumor at this point but we think the firm’s newer businesses (like ads on its app, which management thinks could be a $1 billion business next year!) have great potential to keep EBITDA and free cash flow strong and growing for a long time. We’ll stay on Buy, though don’t be surprised to see some near-term volatility.” That volatility has arrived in the couple trading days since Mike wrote his update. But I still like the stock. BUY

Zillow Group (ZG), originally recommended by Tyler Laundon in Cabot Early Opportunities, had a rough week, down 8% and hitting its lowest point in three months. There was no news to prompt such a selling, aside from the ongoing problems of two-decade-high mortgage rates and low inventory hurting the housing market. Some good news for the industry, however, came from Zillow’s own mouth, as the company forecasts home values to increase 5.8% this year – which could help convince current homeowners to sell, thus alleviating the low-inventory problem. We added Zillow about a month ago as a long-term play on a housing bounce-back in 2024 and beyond, so pullbacks like the current one – while painful in the short term – aren’t enough to sway us. However, if the stock does dip below its 200-day line (44), we may downgrade to Hold until it can get its act together. For now, it remains 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 September 25, 2023.