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Several stock sectors are killing it while the overall market sort of languishes.

The S&P 500 is doing OK so far this year. It’s up about 1.5%. Of course, the index really hasn’t advanced much at all since late October. That’s because technology has been struggling. Those stocks have a huge weight on the S&P and are a major determinant of index returns. But a major story is developing beyond the index averages.

Third-quarter earnings season is only days away. PepsiCo (PEP) will kick off the season on Tuesday, October 10. The “official” start is generally considered to be on Friday, October 13, when major financials like recommended stock Citigroup (C), as well as JPMorgan (JPM), Wells Fargo & Company (WFC) and Blackrock (BLK) report their results. For the S&P 500 members, Tuesdays, Wednesdays, and Thursdays are the busiest, as 20-50 companies report on each of those days. While weekends are almost cleanly bereft of reports, Berkshire Hathaway (BRK/B) provides a stand-out exception (estimated to report on November 4).

The S&P 500 index, of course, is the most widely used benchmark for stock market returns. Individual investors, financial media and those overseeing complicated institutional portfolios use this metric as their core measure of absolute and relative performance.

Professional investment consultants may take umbrage with this statement. These highly trained analysts are well-versed in the intricacies of quantitative analysis and can parse portfolio returns, relative to potentially hundreds of alternative benchmarks, into dozens of marginally relevant categories down to the 8^th decimal place.

Note: Because of the Independence Day holiday, next week’s issue of Cabot Stock of the Week will be published on Tuesday July 6.

The bull market rolls on, and our portfolio continues to deliver, so I continue to recommend that you be heavily invested in stocks that help achieve your investing goals.



Today’s featured stock is a young and small medical stock that few investors have heard of, but it’s growing fast and the stock is going the right way!



As for the current portfolio, we’re parting company with super-safe Realty Income (O), mainly because something’s got to go.



Details inside.



Also, I hope you’ll join me for the 9th Annual Smarter Investing, Greater Profits Online Conference, August 17-19. We have an incredible line-up of experts ready to share their best picks.

We’re only a week into the new year, but it’s been a good start for your value stocks. On average, prices of the stocks on the recommended list (excluding ARCO, which we sold last week) have increased nearly 7%. This is a favorable start, both in absolute terms and relative to the 3% jump in the S&P 500 Index.

Thank you for subscribing to the Cabot Value Investor. We hope you enjoy reading the July 2023 issue.

Almost like an annual rite of passage, major banks reported their Federal Reserve stress test results last week. All major banks passed, in that their capital levels were in excess of the minimum requirements under the Doomsday Scenario conditions outlined in the test assumptions. We’re not the biggest fans of these tests, for reasons outlined in our monthly letter.

Citigroup remains a riskier bank relative to other majors, but also has a higher return-potential share valuation, plus a 4.5% dividend yield to reward patient investors.

It’s time to buy stocks more aggressively.

That’s the case for stocks in general, but also cannabis stocks. Most cannabis companies aren’t really affected by tariffs. But their stocks have been hit recently by the shift to “risk-off” mode among investors.

Another down week – and down day – for stocks as tariff and inflation anxieties continue to run rampant. We may be headed toward a re-test of the post-Liberation Day lows from the beginning of the month. Fortunately, most of our stocks are holding up well, with no big losses in the last week despite a 4.3% decline in the S&P 500. In fact, a number of our stocks are thriving. Today, we add another stock that’s going against the grain of the market. It’s a new recommendation from Tyler Laundon to his Cabot Early Opportunities audience. It’s the kind of all-weather holding that can keep its head above water in this volatile market – and perhaps thrive if/when the tariff dam finally breaks.

It’s been widely noted that the stock market’s sloppy start to 2024 is among the worst in a decade, or longer. Traders and TV commentators carry on about how the first trading day, or week, or month, sets the tone for the entire year. “How goes January, so goes the year” is a frequently bandied saying. It’s enough to make an investor toss in the towel and wait until 2025.

The longer I am in the investing world, the less I listen to this banter. It all sounds great, and maybe there are some years in which these ultra-short-term trends-as-predictors pan out, but they are so unreliable that they are worthless at best. Even if they had a 100% accuracy rate, why make a bet that this perfect record will continue?

Value stocks are starting to gain traction.

No, they’re still not outperforming growth stocks. But the 10.5% year-to-date gain in the Vanguard Value Index Fund (VTV) puts it on track for its best year since 2021, and potentially its third-best year in the last decade. That’s progress. And much of the progress has come this month, as the previously thin bull market rally has spread to the myriad unloved non-tech sectors. Value stocks are up more than 3% this month, outperforming growth stocks (as measured by the QQQ ETF), which are flat in July.

As readers may know, we are generally not the biggest fans of private equity. Our biggest concern is that, while earlier private equity and venture capital funds were remarkably successful in identifying and capturing highly profitable investments for their clients, more recent vintages, going back perhaps 10-20 years, have mostly produced large profits for the fund managers. News that many Johnny-Come-Lately funds will actually lose significant money on the Instacart IPO highlights this problem. High-quality and early movers will likely post enormous profits.

Strong earnings results, Fed rate cuts, and easing trade tensions with China. It’s no wonder stocks are stretching to new all-time highs! Of course, it’s been a bit topsy-turvy getting there these last few weeks. But Wall Street is ultimately a sucker for a strong economy, and that’s essentially what we have until further notice. And in strong economies, it makes sense to invest in financials. So today, we add one of the biggest-name U.S. banks – a stock that made the cut in last week’s Cabot Top Ten Trader issue.

Details inside.

The cannabis sector remains in a correction, weighed down in part by fears of vaping illness, but many stocks are doing considerably better than the sector and our challenge is to own the right ones—so that we can succeed both short-term and long-term.

Current Market Outlook


Our thoughts on the overall environment remain the same—growth stocks continue to slowly repair the damage, though most stocks aren’t out of the woods yet (many have moved right into some tough resistance), and there remains lots of selling on strength and rotation on a daily basis (cyclical stocks look iffy), so it’s tough to make much progress. All in all, we’re going to keep our Market Monitor at a level 6—we’re close to raising it, but the lack of upside breakouts and the continued chop keep us in a “trust but verify” mode. There are things to like, but we need to see more.

Interestingly, this week’s list is heavy on growth stocks, though finding buy points is tricky. Our Top Pick is DocuSign (DOCU), which has shown excellent accumulation since earnings, though we favor keeping it small and/or trying to get in on dips.

Stock Name	Price	Buy Range	Loss Limit
Align Technology (ALGN)	606	590-610	550-560
Arista Networks (ANET)	365	349-359	320-325
CareDx (CDNA)	90	87-91	78-80
Cloudflare (NET)	96	90-93	80-82
Continental Resources (CLR)	35	33.5-35	29.5-30.5
DocuSign (DOCU)	257	249-259	221-226
GoPro, Inc. (GPRO)	12	11.8-12.5	10.5-10.9
Lightspeed POS Inc. (LSPD)	76	73.5-76.5	65-67
Signet Jewelers (SIG)	76	72.5-75	63-65
United States Steel Corporation (X)	27	26-27.5	23-24

When looking at an investment idea, investors may want to replicate this intake process, tweaked of course for a clearly different (and less urgent) task. By using a consistent process, regardless of whether the idea comes from a friend, that off-beat relative, an investment broker or a newsletter, you can better categorize and screen incoming ideas.

Recently, we’ve been adding very aggressive, high-growth names. These potential moonshots are a lot of fun to research and buy, but we need to maintain balance in our portfolio.

This month we’re going with more of a Steady Eddie-type, a small-cap company with a measured growth profile that features sustainable top line growth, significant EPS, and enough cash flow to fund both dividend payments and share repurchases.



I think in a few years we’ll look back and say it was one of the better investment decisions we made in 2021.



Enjoy!

Cannabis companies remain in hunker-down mode as challenges persist. Those include price compression, competition from hemp-based THC product sales, and uncertainty about potential federal reform.

Not all cannabis companies are going to survive. Ayr Wellness (AYRWF) looks like it is about to go under. I’ve only ever kept a very small position in that name, so the company’s demise did not cause too much damage.