5 Best Stocks to Buy in May
By Michael Cintolo, Vice President of Investments, Cabot Wealth Network
One very old long-term stock pattern we used to write more about was the three phases of a growth stock’s life—first is the Romance phase, which comes when the firm is newer, growing rapidly and going bananas as investors fall in love with the story (and overlook any warts); then comes the Transition phase, when the stock becomes more widely followed and loses steam over many months or years; and finally, you have the Reality phase, where the stock tends to be judged on cold, hard facts and details. (Stocks can have multiple Romance phases, FYI, though it usually comes because the firm has a new product or growth avenue.) That preamble brings us to DraftKings (DKNG), one of the leaders in the online sports betting market (as well as online casino action) that had a huge Romance phase into March 2021 as the legalization trend gained steam and the company took share. The problem? With intense competition, marketing dollars were flying out the window and incentives to sign up were gigantic (sometimes up to $5,000 vs. generally a few hundred nowadays) and losses were massive. But the bear market has woken the company up on many fronts, all of them positive: Costs have been cut, with more than $100 million coming off the books last year alone even as it continued its expansion into new markets (Massachusetts just entered the arena this month, too), while marketing spend per customer is also down, and yet customer retention and the effective take-rate is up (more parlays and a bit of luck on outcomes have helped; percentage rose from 6.5% in 2021 to 7.7% in 2022). As an example, for the states it entered in 2018 and 2019, not only did revenue surge (up 50% last year even in these mature areas) but gross margins rose four percentage points while marketing was off 15%, showing that initial investments to grab customers don’t have to be repeated endlessly. To be fair, the bottom line is still deep in the red, but that should soon change—revenues soared 81% in Q4 (analysts see 34% growth this year, likely conservative), and EBITDA should turn positive by Q4 of this year. As for the stock, it was destroyed early last year but bottomed in May and held up in the 10 to 12 area many times through year-end. Then came an early-year rally followed by a reasonable launching pad—with shares testing new 13-month highs in late April. Earnings are due May 4, but if they don’t disappoint, a new uptrend may be getting underway.
D.R. Horton (DHI)
In the real world, the housing decline is on, with higher mortgage rates and so-so real incomes (due to inflation) crimping demand and prices. But in the market, which looks ahead, investors are seeing a not-as-bad-as-feared downturn, especially as homebuilders didn’t overextend themselves (speculative building, etc.), which should keep earnings very elevated compared to years past. D.R. Horton is the granddaddy and largest of all U.S. builders (it recently closed the sale of its one-millionth home in its history), and the just-reported fiscal Q2 report confirmed what many have been thinking—yes, earnings of $2.73 per share were down 32% from a year ago, but that easily topped estimates of $1.90 or so while overall revenues were actually flat. Moreover, the forward-looking measures weren’t bad at all: While the backlog was down a big 44% from a year ago due to some weakness in the second half of last year, new orders were down just 5% in units (11% in value) from a year ago, the cancellation rate was up just two percentage points and sales prices were essentially flat. And management said some soothing words, too, including that tight supply and favorable demographics are essentially pushing back against higher rates and iffy wages. Don’t get us wrong—business here will still fall off a good amount in coming quarters, but Wall Street now sees earnings falling to “only” $11 per share this fiscal year (ending in September), which is miles above the pre-pandemic peak of $5 to $6 per share. A modest dividend (0.9% yield) and active share buyback program (share count was down 3.1% from the prior year) also help the cause. As for the stock, it fell 45% during the bear market, had a great run back toward its old highs into February and then built a very tight, tidy launching pad into Q1 earnings—with a good-looking breakout after the report. There may be some choppiness given the market, but the path of least resistance for DHI (and the group) is up
Intra-Cellular Technologies (ITCI)
Biotech stocks remain hit and miss, but a combination of the sector going nowhere for years (the S&P Biotech Fund, symbol XBI, has made no net progress since early 2015!), some M&A activity (big pharma has tons of cash and little growth) and some real fundamental breakthroughs with individual treatments has some names popping. One we started following more than a year ago is the mundane-named Intra-Cellular Therapies, which has the makings of an emerging blue-chip outfit thanks to one potentially massive blockbuster drug. Called Caplyta, it was approved back in 2000 for the treatment of adult schizophrenia, a market of about 2.4 million people and the firm was and is making good progress there, with around 1,750 patients signed up in less than two years. cabotwealth.com 4 But then came the approval for both Bipolar I and II disorders (importantly, the approval label came both for Caplyta alone and in concert with certain other drugs—the only treatment with such a label), and that accelerated adoption in a big way, with 2022 alone seeing prescription volume triple to north of 6,000 people—and with 11 million people in the U.S. alone with some sort of bipolar the potential is obviously giant. (Indeed, the top brass guided for 2023 Caplyta sales of $440 million or so, up 75%-plus from a year ago.) But even that market looks like just the tip of the iceberg if some recent Phase III clinical trial results hold: The drug has met primary endpoints as a treatment for major depressive disorder (MDD for short), with statistically significant declines in both symptoms and severity. That’s a monstrous deal as there are 21 million people with MDD, some of whom also have bipolar symptoms, too. The bottom line here is that, while Intra-Cellular is still losing money, the upside here is big, with analysts seeing sales advancing from $250 million last year to $444 million this year to $662 million in 2024, with (a) the estimates likely proving conservative, as the firm regularly trashed estimates last year and (b) with much more upside down the road as long as management pulls the right levers. ITCI wasn’t immune to the bear market last year, finally falling to the 45 area in September, October and again in March, but the recent trial results have changed the stock’s character, with the name testing its 2022 (and all-time highs) of late. It could be news-driven in the near term, but it wouldn’t surprise us if ITCI has begun a sustained run. Earnings are due May 10, which is a risk, but most of the story is about what’s coming down the pike.
Lululemon isn’t a new name, of course—it practically invented the athleisure industry a few years ago and its higher-priced wares are in high demand—and the stock hasn’t gone anywhere (on a net-net basis) since late 2020. However, fundamentally, business has remained strong, and big investors are thinking there are plenty of expansion opportunities left in the tank. In Q4, sales (up 30%) and earnings (up 31%) were a bit above expectations, and just as impressive is that all segments are looking strong; on a three-year basis, both men’s (up 26%) and women’s (up 23%) products are growing handily, while accessories (up 44%), e-commerce (up 46%) and North America (up 24%) and international (up 39%) all contributed in a big way. (Lululemon gained 2.3 percentage points of market share in Q4, the most of any apparel brand.) The greater the breadth of products selling well, the more sustainable things are—indeed, management launched a new three-year plan last year, aiming for 15% annual revenue growth and faster earnings growth as margins expand, but that will probably prove conservative as new products are released (including a road-to-trail shoe and updates/expansion to cabotwealth.com 5 many existing offerings), some geographies (especially China) kick into gear post-lockdown and as the firm’s store expansion plan continues to clip along (655 stores at the end of January, up 14% from a year ago; 47 new openings and 25 remodels in 2023, including a couple dozen or so new openings in China). A modest share buyback program ($700-plus million left on the authorization) puts a cherry on top of this still-great retail story. LULU got smacked around with everything else last year but found support in the 270 to 300 area many times in the second half of the year and early 2023, and then gapped up in a huge way after earnings (biggest weekly volume in years). What’s more, shares remained extremely tight after the move, resisting the market’s sell-on-strength mantra, with LULU nudging higher near month’s end. There’s still some overhead to chew through, but our guess is the great numbers and improving chart mean higher prices are coming.
Wheaton Precious Metals (WPM)
The Silicon Valley Bank crisis has prompted fresh fears of another industry-wide banking crisis for investors, in turn generating increased interest in safe-haven assets like gold. Those worries have also pushed the yellow metal’s price toward $2,000 an ounce for the first time in over a year, which could serve as a catalyst for new exploration and mining activities. After reporting below-average gold production last year, leading precious metals royalty and streaming outfit Wheaton (covered in the January 9 report) is in a strong position to benefit from higher production and pricing. The company recently guided for gold output in 2023 to be 17% higher compared to last year, and for output as a whole, the firm sees average production over the next five years to be about 30% higher than 2022’s tally, while output during the next 10 years should be up nearly 40% from last year’s total. Wheaton’s main focus is on high-quality, high-margin operations with a goal of returning a minimum of 30% of cash flow to its shareholders, and in 2022, the firm cranked out a hefty $740 million in operating cash flow (about $1.65 a share) despite the year’s lower production. Revenue of just over $1 billion in 2022 was 11% lower from 2021 and was 15% lower for Q4, while per-share earnings of 23 cents in the quarter missed estimates by two cents, but this was due mainly to lower sales volumes and lower realized gold prices—trends the company expects will reverse in 2023. Looking ahead, management reported a “healthy appetite” for streaming as a source of capital for the mining industry and Wheaton’s war chest of almost $3 billion should allow significant opportunities to complete new streaming and royalty deals. But prices will be the big near-term driver, with any new flood of liquidity from the Fed and other central banks likely to keep precious metals prices headed up. WPM is one of the strongest names in the sector, having eclipsed its January peak in March and rallying all the way back toward its all-time highs. The recent backing-off period looks like a normal digestion of that run.
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About Cabot Wealth Network
This report is published by Cabot Wealth Network which was founded in 1970 by Carlton Lutts, a disciplined investor with an engineering mind who developed a proprietary stock picking system using technical and fundamental analyses.
Since then Cabot Wealth Network, headquartered in Salem, Massachusetts, has grown to become one of the largest and most-trusted independent investment advisory publishers in the country, serving hundreds of thousands of investors across North America and around the world.