Cabot Stock of the Week Issue: September 25, 2023

“Higher for longer.” The market didn’t like that gem from Jerome Powell, the Principal Rooney to market bulls’ Ferris Buehler. Investors were ready to party this summer, and it seemed for a while like the party might go into the wee hours. But Powell and the Fed are hellbent on repeatedly turning on the lights and saying “last call” before the party can really get going. So, here we are: Still in a bull market, but going on two months of mostly losses.

It’s been an exhausting about-face, especially considering how tantalizing June and July were. But it’s also not abnormal for a new bull phase. According to Ryan Detrick of Carson Research Group, when the S&P 500 is up double digits in the first half of a year (like it was this year), it tends to be sideways to down in August and September before rallying in the fourth quarter.

Of course, the Fed, inflation, interest rates and bond yields are all anyone can think about. And that’s the problem. When stocks are down, the market needs a scapegoat. The Fed hiked rates in May and late July, and investors hardly batted an eye. Now, when the Fed doesn’t hike rates but signals that they likely will do so one more time before year’s end, and says rates will remain “higher for longer” … some mild panic (and selling) sets in.

I don’t think it will last. As I’ve written before, new bull markets – like the one we entered in the first half of this year – almost never up and fizzle in the first year or two (or longer!). Pullbacks along the way, however, are common. And that’s exactly what this is: a drawn-out, fairly painful pullback. By year’s end, however, I think share prices will be higher – perhaps much higher. And that makes this a good time to buy stocks at relative discounts.

So today, we add a stock in one of the most beaten-down sectors year to date, biotech. It’s a new recommendation from Tyler Laundon in his Cabot Early Opportunities advisory. Here are Tyler’s latest thoughts on it.

Krystal Biotech (KRYS)

Krystal Biotech (KRYS) 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.

The key to Krystal’s platform is its proprietary skin Targeted Delivery (STAR-D) platform and modified HSV-1 viral vectors.

Glossing over specifics, the key takeaway should be that its pipeline is full of potential gene therapies that have both high cargo capacity and redosing ability. These attributes mean Krystal’s therapies could work for large, chronic conditions with very significant markets.

Beyond the technology platform, Krystal has also put together significant manufacturing capacity (over 175,000 sq. ft. in the U.S.) and has partnership opportunities that could help fund pipeline development/commercial launches and/or bring new therapy candidates into the pipeline.

Turning to the here and now, investors have pushed shares of KRYS higher lately due to approval of the first FDA-approved re-dosable gene therapy, Vyjuvek, which is indicated for DEB.

DEB is a very rare genetic disease characterized by fragile skin, recurring and chronic wounds and serious complications. The treatment showed significant rates (high 60%) of complete wound healing after both three and six months.

Not long after being approved in May, management disclosed (at the time of the Q2 report) that it only took six weeks to receive 121 patient start forms. There are rumors that the number could climb into the low-to-mid-200 range by the end of the year. Infusion is set to be handled by Option Care Health (OPCH) and Amedisys, so some of this will depend on how those companies operate.

The bottom line is that analyst consensus estimates are calling for revenue to go from zero in Q2, (remember Krystal hasn’t had a commercial product before now) to $8.7 million in Q3 and $25.8 million in Q4.

That implies 2023 revenue of $33.1 million, then $186.4 million in 2024 (+462%).

While EPS isn’t going to be positive for a while, it should go from around -$4.84 this year to -$1.09 in 2024.

These are loose numbers given the early-stage nature of the commercial launch. But what we do know is that Krystal’s platform has been proven to work and that raises the odds of more shots on goal actually going in.

More progress on Phase 1/2 therapies for skin (KB105), lungs (KB407) and solid tumors (injectable KB707 entering Phase 1 in second half of this year) would likely be well-received by investors.

Lastly, Krystal has no debt and $506 million in cash.

As for the stock, KRYS went public at 10 in September 2017 then didn’t do much for about a year. In mid-2018 shares took off, eventually peaking near 66 at the end of 2019. 2020 was a down year then KRYS rallied to 85 by the end of March 2021.

That 85 price has been a significant level. It was the top for a while as shares floundered for much of 2021, and the first half of 2022. Shares challenged 85 again in August of 2022, failed to break out, then spent most of the first half of 2023 bumping up against it.

There were a few little rallies to 90. But the big breakout came on May 19 - 22 after the FDA approved Vyjuvek. KRYS promptly shot to 120. The stock has since traded in the 107 to 132 range. We’ll jump in here, around 120.

Current Recommendations

Changes Since Last Week: GitLab (GTLB) Moves from Buy to Hold

No sells again this week, which boosts our portfolio to 22 stocks. That feels like a lot given that the market is at its lowest point since June, but it also speaks to the fact that many of our stocks are holding up relatively well – or at least none have completely fallen apart. GitLab (GTLB) is the closest to doing so, though it has yet to dip below its mid-August lows, so we simply downgraded it to Hold.

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

Updates

Alibaba (BABA), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is down from 87 to 86 since we last wrote, with all of the losses coming this morning. Today’s early drawdown comes on the heels of a big run-up last Friday on news that Alibaba plans to spin off one of its subsidiaries, Cainiao Network Technology, into an IPO as early as this week. The company plans to file in Hong Kong, and Cainiao – Alibaba’s logistics business – is seeking to raise $1 billion in its offering. It could be the first of several IPO spin-offs from Alibaba, as has been reported. Meanwhile, as Carl wrote last week, “Alibaba’s Digital Media Entertainment business group has achieved impressive revenue growth of 36% year over year and just recorded its first-ever profitable quarter. This is a contrarian recommendation in a high-quality company selling way off its high.” BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, is down slightly despite news this morning that the company is buying AIG’s U.K. protection business for $563 million. The deal will expand the London-based life insurance company’s presence in the U.K. as the company attempts to bring more of its business closer to home, and is designed to reach more high-net-worth entities and small- and medium-sized customers. Shares have 43% upside to Bruce’s 14 price target. HOLD

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down more than 3% in the last week on no news. It’s simple, really: Because it’s an investment-related business that caters to both institutional and individual investors, Blackstone is what Mike calls a “Bull Market Stock.” When things are looking up in the market, BX shares usually run even higher. When stocks are down, so is BX. So it’s no surprise BX was down last week. Still, we maintain a modest gain in the stock and with the bull market intact – all signs point to higher prices in the intermediate term, perhaps even in the fourth quarter – it’s worth buying BX shares for when the rally resumes. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, continued its recent pullback, shedding another 2.5% last week. Shares fell in part because Google reportedly may drop Broadcom as its chip supplier in favor of an in-house option as soon as 2027. The move would reportedly save Google billions, so it makes sense. If true, it would leave a void in Broadcom’s chip-making business, though it does have plenty of time to find a replacement to help keep pace in the artificial intelligence arms race. Plus, the deal it signed in May with Apple to supply it with 5G and wireless connectivity components should help make up the difference. In June, Broadcom CEO Hock Tan said that AI could account for roughly a quarter of the company’s semiconductor revenue. So this remains a strong AI play – Google or no Google. BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, remains in the 62-to-65 range, though it did dip to 60 one day last week. In his latest update, Carl noted that “the company set competitive prices for its low-cost Dolphin EV in both Europe and Japan. BYD remains confident of selling 3 million EVs in 2023, which is about the total number of EVs sold in America over the last decade.” 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. The lack of movement qualifies as a victory considering the downturn in the market this month. This media giant is perhaps the steadiest, most reliable (+40%, not counting the dividend) performer in our portfolio. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, is down about 4.5% since we last wrote, mostly in sympathy with the market retreat. In his latest update, Mike wrote, “CRWD has thrashed back and forth of late with the market, but overall we think it’s acting well, holding near its highs despite the recent upmove, which is a rarity of late. The firm has unleashed a firehose of press releases this month, highlighted by a handful of next-generation upgrades/advances of its Falcon platform and AI capabilities, a new partner program that should help boost sales, a marketplace for third-party products that work with its platform, a no-code development platform that allows clients to build upon Falcon. But the big news came last night: While management didn’t officially raise near-term guidance, it did significantly boost its ‘target model’ of margins to be achieved during the next three to five years, including a boost of nine percentage points (!) to its operating margin target and a boost of five percentage points (to 36%-ish) to its free cash flow margins—all while the top brass threw out talk of $10 billion of annualized recurring revenue within five to seven years (which would represent 20% to 25% annual growth from here). Again, that wasn’t ‘official’ guidance, but it didn’t stop a bevy of upgrades and reiterations from Wall Street this morning. Near term, this doesn’t mean CRWD is going to ignore the market’s weakness, but it should offer some support on dips—as should the purchase of Splunk (SPLK) today by Cisco (CSCO), as SPLK has a bit of a cybersecurity angle. We’re hanging onto our half-sized stake, and if you don’t own some, are OK starting a position here or on weakness.” BUY

DraftKings (DNKG), originally recommended by Mike Cintolo in Cabot Growth Investor, had a bad week, falling more than 10%, though it’s still north of its mid-August lows and well clear of its 200-day moving average. In his latest update, Mike wrote, “DKNG rallied all the way back toward new closing highs two weeks ago (very encouraging, especially after the prior nose-dive related to ESPN), but like most things, the buying power ran dry near resistance, with shares gyrating slightly lower since then—all in all, it’s basically stuck in the middle of its range of the past couple of months, much like the overall market. There have been no official updates on how the sports betting industry is faring early in the football season (generally the busiest time of the year for the sector), though there’s optimism given some studies and estimates that the industry is still enjoying boom times. If the stock can generally hold here and eventually accelerate higher during a more supportive market, we’ll fill out our position—we still think DKNG quacks like an emerging blue chip and should see accelerated profitability going ahead.” BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was down another 4% this week after touching new all-time highs two weeks ago. There was no news; rather, the stock was due for a pullback after running up unimpeded for months, and the latest market downturn has provided investors with the perfect excuse to shed a few shares. I hope you did the same two weeks ago, when I advised selling about a quarter of your position with LLY at all-time highs. We’ll keep our rating at Hold until shares find a bottom – the stock is bumping up against six-week support in the mid-540s. But this is still a phenomenal company, with two mega-blockbuster drugs slated for FDA approval before year’s end and excellent earnings growth for years to come. HOLD

GitLab (GTLB), originally recommended by Tyler Laundon in Cabot Early Opportunities, had a bad week, and is in a tailspin, down 15% in the last two weeks after appearing close to hitting new six-month highs. Company insiders have been selling shares of late, which is not a great sign. But there hasn’t been any bad news since the company reported strong revenue growth (38%) in its most recent quarter. Still trading north of its mid-August lows (43), we’ll hang on to it, but let’s downgrade this falling stock to a Hold. MOVE FROM BUY TO HOLD

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down another 3.7% despite getting an upgrade from Guggenheim analyst John DiFucci. DiFucci had previously listed MSFT as a Sell, but upgraded to Neutral, writing that its AI leadership position is “too strong a force to contend with.” As for the stock, it’s bumping up against three-month support at 316 as of this writing. A bounce would be healthy. A dip below it could result in a deeper pullback. Could be a pivotal week for the stock. Keeping at Buy for now. BUY

Neo Performance Materials Inc. (NOPMF), originally recommended by Carl Delfeld in Cabot Explorer, has dipped below 6 support as of this morning after hovering near 6.5 for weeks. There was no news. Insiders have been picking up shares of late, which bodes well for a turnaround. Let’s maintain our Buy but keep a close eye on this manufacturer of advanced tech industrial metals and materials. BUY

NextEra Energy (NEE), originally recommended by Tom Hutchinson in the Safe Income Tier of his Cabot Dividend Investor advisory, was down about 2% in its first week in our portfolio. But Tom is encouraged, as he wrote in his latest update: “The weakness might be ending as NEE has made a move off the bottom. This stock is still wallowing near a multi-year low, but it has historically been a superstar performer. NEE moved above the low last week and may be finally perking investor interest. The utility grew earnings 8.6% in the second quarter and 11% in the first half versus the same periods last year. It also has predictably solid earnings going forward because of a considerable project backlog. It’s a great stock that is just out of favor right now and selling near a multi-year low.” BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, was down another 2.5% this week despite a BMO Capital Markets note predicting that the global weight-loss drug market will reach $100 billion by 2035. Novo Nordisk boasts two of the top-selling drugs in the weight-loss space with Ozempic and Wegovy, which have helped sales balloon from $25 billion in 2022 to an expected $30 billion to an estimated $44 billion in 2025, according to analysts. Profits surged 43% in the first half of this year. We still have a 37% gain on the stock since adding it to the portfolio late last year. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, is down about 6.5% since topping out at 605 two weeks ago. There was no news, and the latest pullback is likely market-driven. 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%. As long as the stock holds above support in the low 540s, you can accumulate on weakness. 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. 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, fell from 59 to 57 in the last week, though it’s up today. It’s still comfortably above support at 55. 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, is down 7% since we last wrote, ahead of the company’s third-quarter deliveries report. Still, the stock is well north of its mid-August lows (215), a Morgan Stanley analyst recently raised his price target to 400, and Europe reported an uptick in auto registrations for electric vehicles. With shares well above their 200-day line, the recent dip looks like a solid buying opportunity. BUY

Tractor Supply Company (TSCO), originally recommended by Tom Hutchinson in the Dividend Growth Tier of Cabot Dividend Investor, lost about 1.5% this past week to briefly touch new 2023 lows. 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 growth 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.” For those reasons, we’ll keep it at Buy for now. But another dip below 206 support could prompt us to reassess. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, has given back most of the gains it achieved in the first half of September. The action isn’t abnormal in this environment, and the stock is still holding above 43 support. In his latest update, Mike wrote, “It looks like one of Uber’s recurring bugaboos—regulation trying to make drivers full-time employees—could be an issue in Europe, though Uber said it wouldn’t affect its profitability (instead using third parties to drive), though it would likely slash availability and boost wait times. Still, the market isn’t worried, with a lot more focus on the growth seen in the underlying business and some excitement surrounding some of the tidbits management revealed at its talk a couple of weeks ago. Of course, right now the fundamentals are taking a back seat to the market, which is pressuring just about every name out there.” With a 32% gain on the stock, we’re still in good shape. BUY

Zillow Group (ZG), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down another 3% this week and is nearly 20% off its mid-August highs. There was no company-specific news, although the Fed’s “higher for longer” vow on interest rates last week surely isn’t helping a housing market that’s being saddled with mortgage rates north of 7%, the highest in more than two decades. Still, the intermediate-term growth outlook – likely starting in 2024 – remains upbeat for both the sector and the company, which projects 12.3% revenue growth in 2024 after expected losses this year. We’ll keep shares at Buy for now, but they need to find a bottom soon or we will likely change our tune. 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 October 2, 2023.