Cabot Stock of the Month Issue: August 8, 2024

Market Review

I have to admit, a couple of weeks ago, on our Cabot Street Check podcast, Chris Preston, host and Chief Analyst for Cabot Value Investor, and I discussed the possibility of a recession and I commented that I thought recession fears were mostly over.

Well, I’m going to reconsider that (a bit) after Monday’s 1,000+ point loss in the Dow. Last week’s jobs reports came in at 114,000 jobs—considerably less than the 185,000 expected—spooking the markets and causing economic gurus to once again bring up the possibility of the dreaded “R” word. Additionally, the unemployment rate edged up to 4.3% and manufacturing and construction spending were also less than expected, furthering economic worries.

I’m no soothsayer, so I don’t know if a recession is still in the cards, but I can tell you that many parts of the economy are still strong.

For instance, auto sales continue to accelerate, pending home sales (despite high interest rates) were more than three times what analysts had predicted, and consumer confidence rose.

Additionally, earnings for the second quarter are looking pretty good. More than three-quarters of companies in the S&P 500 have reported, and 78% have posted positive EPS surprises with 59% showing revenues above Wall Street’s forecasts. That gives us an 11.5% earnings growth rate for the quarter—not too shabby.

Large-cap stocks continue to lead the market, with Growth stocks producing 9.52% gains, year to date, followed by Value stocks, which have risen 5.34% during the same time period. Small caps have recently shown life, with Growth stocks gaining 1.94%.

Sector-wise, Utilities are ahead so far in 2024, up 14.10%, followed by Communication services (+13.28%) and Financial Services (+8.62%). The weakest sectors are Consumer Discretionary (-4.27%), Real Estate (+1.47%), and Technology (+2.82%).

Here at Cabot, Monday’s sell-off does cause concern as it was so steep, although there was a bit of a mid-day rebound. For now, we are not panicking, but as Mike Cintolo, Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader, said to his subscribers, we suggest you pay attention to your stop-loss settings.

Tuesday’s market action was also positive, so you should be prepared to scoop up some discounted stocks, such as the idea I have for you today—a company in a burgeoning industry that is not only growing at double-digit rates but has also leapt into profitability—a feat not yet managed by most of its sector.

Feature Recommendation

Green Thumb Industries Inc. (GTBIF): Staking Its Claim on Cannabis Growth

Recommended by Michael Brush, Chief Analyst, Cabot Cannabis Investor

Green Thumb Industries Inc. is a jack of all trades in the cannabis industry, manufacturing, distributing, and selling cannabis products for both medical and recreational use in the United States.

The company is divided into two segments, Retail and Consumer Packaged Goods. Its products include processed and packaged products, including pre-rolls, concentrates, vapes, capsules, tinctures, edibles, topicals, and other cannabis-related products, sold under the &Shine, Beboe, Dogwalkers, Doctor Solomon’s, Good Green, incredibles, and RHYTHM brands.

Also included in these brands is cannabis flower—"bud” or “nugs,” which are the dried buds of the female cannabis plant. This part of the plant contains the highest concentration of cannabinoids and terpenes, which are the compounds responsible for the effects and aroma of cannabis

The company distributes its products primarily to third-party retail customers and sells finished products directly to consumers in its own retail stores, as well as through a direct-to consumer delivery channel.

Here’s what Michael had to say about Green Thumb:

“For stocks, I’d single out one of the highest-quality names in the group, Green Thumb (GTBIF). Green Thumb is conservatively managed. It has developed a stable of popular brands, and it is using a strategy I like to see. One of the qualities I look for in cannabis companies is positioning in states ahead of expected legalization or expected expansion to recreational use from medical use.

“The company operates a national retail cannabis stores called RISE and is opening a lot of stores in markets that look poised to expand to recreational-use sales, like Florida and Pennsylvania.

“Green Thumb has opened two stores in Tallahassee, Florida. The openings take Green Thumb’s Florida store count to 19. It has 96 stores in 14 markets. Floridians will vote in November on legalizing rec-use and polls suggest they will vote in favor, though it will be close.

“The company is run by founder Ben Kovler. He is CEO, and he has a big position in the name. Research shows that founder-run companies often outperform. Kovler has a 26% stake in the business and holds nearly 59% of voting power.

“Green Thumb continued to demonstrate why it is the blue-chip name in the cannabis space in the first quarter. The company reported a 240% increase in net income on May 8 to 13 cents per share year over year, on revenue gains of 11% to $276 million. Sales advanced in large part due to store openings. It added fifteen RISE stores in the quarter. Same-store sales, or sales at stores open more than a year, advanced 1.8%. The launch of recreational-use sales in Maryland also helped.

“Operating cash flow increased 12% to $84 million. It was a record quarter for sales and operating cash flow. Green Thumb bought back one million shares. It ended the quarter with $224 million in cash against debt of $310 million.

“The company has good exposure to several states where recreational-use sales are coming online, like Ohio and Minnesota. It also has good exposure to states which will potentially see this change, such as Florida and Pennsylvania. ‘In the last 24 months, we’ve deployed significant capital into these markets and our well-timed investments should provide strong shareholder cash-on-cash returns,’ said President Anthony Georgiadis

“Unlike other cannabis companies, Green Thumb is not currently challenging the federal 280E tax. But it estimates it would save over $100 million in taxes a year, if 280E went away.

“Green Thumb has been the most profitable multistate operator of all the big ones—a sign of good management.

“And it is our biggest position in our portfolio.

“The good news for investors circling the space is that right now sentiment is about as negative towards the group as I have even seen. Look at the charts. Cannabis stocks and ETFs are nearly as compressed as they have ever been. This doesn’t guarantee they can’t go lower. But a lot of the potentially negative outcomes for the space are already priced into the names. And there’s a chance we will see the positive catalysts we talked about above.

“This is usually a good time to buy a group. I think entry points for these names are attractive right now. Just be aware of the risks. Buy.”

Wall Street also thinks that Green Thumb is trading at a discount—about 49% to its fair value. Like Michael, analysts see the expansion potential of the company, citing its expected growth rate of 27.86% over the next three years. Near-term price estimates for the company are 16, a considerable rise from its current trading level.

That undervaluation, along with double-digit growth, widening legalization, and increasing medical usage, the shares of Green Thumb look very attractive. Add in the low institutional holdings in the shares (currently 9.63% of the company’s outstanding stock), and you have lots of potential for price appreciation when the institutions begin to pile in.

About the Analyst: Michael Brush, Cabot Cannabis Investor

Michael Brush is an award-winning Manhattan-based financial writer who has covered the stock market, business and economics for the New York Times, the Economist Group, MSN Money, Money magazine, and Dow Jones.

Besides responsibilities for the Cabot Cannabis Investor, he writes a regular MarketWatch column on investing and he manages his own stock letter, called Brush Up on Stocks.

Brush is a graduate of the Columbia University Business School (Knight-Bagehot Fellowship program), and the Johns Hopkins University School of Advanced International Studies (SAIS).

He is the author of Lessons from the Front Line (published by John Wiley), a book offering investing insights based on the experiences of leading professional money managers he’s met on the job.

Brush has received several awards for excellence in journalism including the Best in Business award from the Society of American Business Editors (SABEW), the American Society of Magazine Editors’ National Magazine Award for General Excellence in New Media, and awards for excellence in local news coverage in Pennsylvania, where he started his career in journalism.

The cannabis industry has been fairly depressed since its rise during the pandemic. But expanding legalization in several states is attracting new interest from investors. Consequently, I thought it might be time to take another look at it.

And to give us an in-depth view of the industry, I turned to our resident cannabis expert, Michael Brush, Chief Analyst of Cabot Cannabis Investor.

Here is our interview:

Nancy: There have been many changes in the cannabis industry in the last year, Michael. In your latest issue of Cabot Cannabis Investor, you mentioned some of the upcoming catalysts below. Would you please comment on each of these points so that my subscribers are up to date on the cannabis industry?

Michael:

Progress on rescheduling. The background here is that Democrats see cannabis reform as a way to win over younger voters who generally favor legalization. So, President Joe Biden has asked his Department of Health and Human Services (HHS) to review rescheduling cannabis under the Controlled Substances Act (CSA) in an expedited manner. The HHS sent a detailed report to the Department of Justice (DOJ) and its Drug Enforcement Administration (DEA) asking them to reschedule cannabis. (The DEA is inside the DOJ.) HHS asked them to move cannabis to Schedule III from Schedule I under the CSA.

This would be a historic policy change. Cannabis has been in Schedule I alongside drugs like heroin since the early 1970s. The investing angle is that it would increase cash flow at cannabis companies greatly by neutralizing an Internal Revenue Service rule called 280E. This prevents cannabis companies from deducting operating expenses against revenue from Schedule I drugs like cannabis. Rescheduling would also make it easier to research cannabis for medical purposes.

Public comments on DOJ’s proposed rescheduling were overwhelmingly positive. It received more than 40,000 comments. About 91% of comments were in favor of the rescheduling proposal or making cannabis legal. This was not surprising. A 2023 Gallup survey found that 70% of Americans support legalization, and a recent Pew Research Center poll found that less than 10% of Americans support prohibition.

Now, we await the DEA’s actual decision on rescheduling. It would be a huge catalyst for the sector. If the DEA and DOJ do decide to publish a final rule, it probably won’t happen until October. Politicians like to announce good news as close as possible to the election. I give rescheduling before the election 60% odds, but it’s really tough to call. There is not a lot of transparency into the process. But there is the political will to get this done. Biden has made it a priority, and Kamala Harris has asked the DEA and DOJ to get it done quickly.

The November vote in Florida and other states on legalizing recreational use.

Florida permits medical use of cannabis. Now, voters have the chance to approve a referendum that would legalize recreational use. This would be a huge catalyst because Florida is a large state, and it gets a lot of tourists. The referendum needs 60% approval to pass. Polls say it will be close. But reform advocates have over $40 million to spend on promoting the change and they haven’t even started. Their campaign could tip the scales.

North Dakota will probably have a similar referendum. That’s a small state. But presumably, approval would put pressure on its Senators to be more favorable to federal reform. Besides Florida, the other big state to watch is Pennsylvania. It allows medical use, and the governor there wants the state to transition to recreational use, too. Pennsylvania is surrounded by states that permit rec use, so it’s losing out on a lot of tax revenue because its residents go across state lines to buy cannabis.

Progress on SAFER banking reform in Washington, D.C. SAFER banking refers to a bill that would let banks serve cannabis companies, so stores don’t have to operate in cash only. That is cumbersome and it raises the risk of robberies. This change has been kicking around for years. But as logical as it seems, at the very least because it could improve safety for store employees, Congress continues to delay. It’s really not clear when it might pass, but it is out there circling.

Progress in Europe. Germany is taking the lead here. It recently took cannabis off its narcotics list. This makes it much easier for doctors to recommend cannabis to patients. Legal market sales skyrocketed, and the robust growth trend in Germany is not over. Poland and the Czech Republic are making progress and other countries will follow.

Cannabis investors don’t talk much about the European market, but it will be huge. Tilray (TLRY) CEO Irwin Simon thinks the European medical-use market alone could reach $45 billion in annual sales, in the long term. For context, U.S. rec-use and medical-use sales combined were a little over $33 billion last year. The population of the European Union is around 449 million, compared to 335 million in the U.S. I give further European reform 100% odds. It will be slow, but the momentum is there.

Nancy: How many states in the U.S. currently have approved medical vs. recreational use of cannabis? And in which states is legislation pending?

Michael: One of the things I learned covering Washington, D.C. is that there is virtually always legislation pending somewhere on every topic. The question is whether it is viable. I’d pick Pennsylvania and Florida as the next big states to expand into recreational-use sales from medical use. In Pennsylvania, it will happen through legislation. In Florida, voters will likely approve a referendum legalizing rec use this November, but the vote will be close. As an example of pending legislation that never goes anywhere, the North Carolina Senate has approved a medical-use bill three times, but it never makes progress in the House.

North Carolina is one of 12 states that do not even allow medical cannabis use. In other words, 38 states have legalized medical use, and 24 states have legalized rec use. The majority of the U.S. population lives in states that have legalized cannabis in some way.

Nancy: Revenues for the cannabis industry are growing at double-digit rates, rising considerably over the past three years. What are you projecting for the next five or so years, and when do you see positive earnings for the overall industry materializing?

Michael: I don’t think it’s possible to predict anything over a five-year time horizon with any accuracy. But high level, cannabis sales growth will be very big. The reason is a concept I call “cultural momentum” towards liberalization of cannabis laws.

Entities from sports leagues to police forces nationwide continue to downplay the importance of cannabis screening. A sheriff in Florida just came out in favor of rec-use legalization because of concerns about fentanyl in illicit-market cannabis. Heartland states like Michigan and Illinois where rec use is legal, continue to post big sales growth. It’s clearly not just a coastal thing. Per capita annual sales in Michigan are $234, compared to $75 in California. Generally younger people vastly favor legalization, on both ends of the political spectrum. So, it’s a generational issue, as well.

Long story short, while I don’t know the precise growth over the next five years, I am certain that legal cannabis sales growth will vastly outperform GDP growth over the next five years. Finding industries growing a lot faster than the overall economy is one of the keys to successful investing.

To put numbers on it, researchers who think they can predict sales trends over five years are putting out numbers that suggest enormous growth. One research group called MarketDigits thinks global, legal-market sales will hit $157 billion by 2030, from $26.6 billion in 2022. That’s 29% annual growth. A more commonly cited industry group called BDSA thinks legal market sales will hit $58 billion by 2028 compared to $36 billion in 2023, for 10% annual growth.

You can see the projections are all over the map. I have no idea if either one will be right, but directionally, I am certain they will be correct.

Nancy: Do you think a Democratic or Republican administration (after November’s election) will change the industry’s progress? If so, how?

Michael: Kamala Harris would be much better for the cannabis sector than Donald Trump. This is why I am surprised cannabis stocks did not do better after a Fox News poll in late July showed Harris took the lead over Trump in five or six swing states.

The big difference is that Harris supports full legalization. Trump does not. He’s never been a big fan of cannabis reform. On the other hand, Trump is not entirely negative for the sector. He supports legalization of medical cannabis. He thinks cannabis policy should be left to the states, which implies a green light for further state-level legalization.

Harris is also better for the cannabis sector than Biden, who opposes recreational-use legalization. As chair of the Judiciary Committee years ago, he helped shape drug policy that stigmatized cannabis. Harris is also better for the sector because recent polls say she stands a better chance than Biden of beating Trump.

Nancy: The use of medical marijuana is also growing rapidly, and includes usage for conditions such as:

• Insomnia
• Nausea and vomiting
• HIV/AIDS
• Pain
• Neurological conditions
• Mental health

In your research, which additional conditions where medical marijuana may be of assistance are currently being analyzed and discussed?

Michael: That pretty much covers it. Medical-use states have recently approved doctor recommendations of cannabis for generalized anxiety disorder and “female sexual dysfunction,” the medical euphemism for difficulty having orgasms.

We see studies practically every week claiming cannabis or CBD can treat everything from cancer to skin damage from the sun. You have to be cautious here. Most of these studies are based on weak science. Especially if you consider double-blind, placebo-controlled research the gold standard, like the FDA does.

One of the most disappointing things here is that it is so hard in this country to study medical applications for cannabis, because of the Schedule I status under the Controlled Substances Act. There’s a lot more medical research on cannabis in Israel and other countries, but the FDA generally does not give much weight to study results from outside the U.S.

Nancy: What are the 3-5 most critical challenges to growth of the stocks in your portfolio right now?

Michael: People have used cannabis for literally thousands of years. But more recently, in the past century, it has become stigmatized. There were racial overtones behind the prohibition of cannabis in the 1930s, and certainly in the 1960s and early 1970s. Richard Nixon went after cannabis and stigmatized it because he perceived it to be the drug of choice among his more liberal opponents. This is changing, though. Younger people are much more likely to favor legalization, and indeed now the majority of Americans favor legalization. But overcoming the stigmatization remains a challenge. I don’t encourage people to use cannabis. But I also think they should make the decision based on factual evidence, not political propaganda.

Another big challenge is the illicit market. Prices are naturally lower because illicit suppliers don’t pay taxes. We will probably always have an illicit market. But a lot of consumers will migrate over to the legal market because of safety issues. Legal product is tested and guaranteed not to have mold, really bad pesticides and fentanyl, which does crop up in illicit cannabis from time to time.

The third challenge I’d cite is the sheer complexity and density of the federal bureaucracy, which moves very slowly. Getting cannabis rescheduled involves two big agencies, Health and Human Services and the Department of Justice. Inside those, the FDA and the Drug Enforcement Administration, among others, have a say. Congress could make cannabis legal at the federal level and reschedule or de-schedule it. But getting anything done in Congress is particularly complicated, especially with a stigmatized and politically divisive product like cannabis. I predict it will be legal at the federal level at some point. The cultural momentum is there. But it will take time.

I’d like to add that cannabis stocks are extremely volatile. Their future depends in large part on the decisions of politicians who don’t always act in a predictable or rational way.

Volatility is great for some people. People who like to use volatility to their advantage, either to trade or get better prices on names they understand. Both Mario Gabelli and the value investor Robert Robotti recently told me they love volatility, for this reason.

But volatility isn’t for everyone. It is terrible for people who get nauseated by it. They should only take small positions and probably in a broad exchange-traded fund. The one I would suggest for volatility-sensitive investors is AdvisorShares Pure U.S. Cannabis (MSOS). If you like volatility, consider the leveraged version, which moves twice as much in either direction. It is called AdvisorShares MSOS 2X Daily (MSOX). MSOS and MSOX tend to own the better names in the space.

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Portfolio Updates

Updating Qualcomm Inc. (QCOM), Tom Hutchinson, Chief Analyst of Cabot Dividend Investor, had this to say: “The technology sector, and chip stocks in particular, continue to get hit. QCOM fell about 15% so far in July after having already declined nearly 15% from the high. The main issue was that the Biden administration put additional restrictions on AI chip exports to China. Chip makers that sell to China took a huge hit because of not only the export curbs but fears of retaliation. The fear has expanded to overvaluation in the sector as earnings are likely to slow. But Qualcomm is still well positioned ahead of AI coming to mobile devices, which should trump any of these issues over time. Earnings will be reported later this week. Hopefully, it will be a strong report that revitalizes the stock in the near term. BUY”

Tom’s hopes were fulfilled. QCOM earned $2.33 a share on sales of $9.39 billion in its fiscal third quarter. Both of those numbers exceeded analysts’ expectations, which were $2.25 a share on sales of $9.21 billion.

For the next quarter, analysts are predicting EPS of $2.55 on sales of $9.9 billion. But analysts’ concerns for the December quarter were moderated by the company’s prediction of flat smartphone growth. And that caused the stock to fall further.

However, the price targets for QCOM remain in the low-to-mid-200s.

Due to the recent decline in the stock, I am moving it back to a Buy rating.

Michael Brush also updated our holdings of Curaleaf (CURLF), saying, “Curaleaf is opening two medical-use stores in New York, in Rochester and Syracuse. It is also rolling out recreational-use sales at two medical-use stores in the state in Plattsburgh, and Forest Hills. The openings take the company’s New York store count to six. New York stumbled out of the gate, but recent cannabis policy reform makes recreational-use sales growth more likely. The state is still in the early stages of becoming a rec-use market. BUY”

Curaleaf will report its financial and operating results for the second quarter after market close on August 7, 2024. Wall Street is forecasting a loss per share of $.06 on $344.91 million in revenues. We will continue to Hold.

Tyler Laundon, Chief Analyst of Cabot Small-Cap Confidential and Cabot Early Opportunities, gave us his views on TransMedics Group (TMDX), commenting, “TMDX continues to hang out near 150 as we move closer to the Q2 report on July 31. There were a couple of price target increases this week as Morgan Stanley went from 104 to 145 and Piper Sandler went from 120 to 170. TMDX closed just shy of 150 yesterday. Morgan Stanley’s note mentioned that the Q2 focus will likely be on how OCS permits market expansion into less-than-optimal organ donor pools and on the evolution of two competitors, OrganOx (liver transplant tech) and the Swedish company, XVIVO (XVIPF), which has seen shares do very well recently. One wonders if TransMedics’ international growth plans might include XVIVO. HOLD A QUARTER.”

Tyler has been right on the money with this stock. In its second quarter, TMDX posted EPS of $0.35, beating analysts’ estimates of $0.21. Its revenues grew 118%, to $114.37 million, also handily surpassing Wall Street’s forecast of $98.97 million.

The company also raised its full-year 2024 outlook, with revenue guidance of $425 million to $445 million topping its prior guidance of $390 million to $400 million.

Our position in TMDX has risen more than 115%. Let’s continue to hold our remaining shares.

Tom also updated his take on Brookfield Infrastructure Partners (BIP), noting, “This great infrastructure company stock finally got a move on. It is now at the highest price since last fall. It’s now up over 14% in July alone. BIPC had been a stellar performer for many years prior to inflation and rising interest rates. Higher interest rates increase borrowing costs and limit the company’s ability to profitably fund growth projects. But there is pent-up upside in BIPC when interest rates significantly decline. The operational performance has been sound. Brookfield reported strong earnings last quarter and reports again later this week. (This security generates a K1 form at tax time). BUY”

Brookfield held up pretty well in yesterday’s rout, probably due to its good second-quarter earnings report. Brookfield Infrastructure posted funds from operations (FFO) of $608 million, a 10% increase over the prior year period. Continue to Buy.

Chris noted that NOV, Inc (NOV) “reported Q2 earnings, and revenue ($2.22 billion) improved 5.9% from the second quarter of 2023; earnings per share ($0.57) improved 46%; and profit margins increased from 7.4% to 10%. Its adjusted EBITDA margin came in at 12.7%, the highest since 2015. Energy equipment accounted for more than half of total revenues ($1.2 billion) and was up 8% year over year.

“Investors liked what they saw from NOV, and shares are up more than 12% since the report. They’re closing in on a 2024 high, though they’ll have to punch through 21 resistance to get there. Shares are still relatively cheap, trading at 14x earnings estimates and at 0.92x sales. BUY”

Looking forward, NOV expects third-quarter revenues to be flat to up in the low- single-digit percent range and Adjusted EBITDA to be between $270 million and $305 million. For full-year 2024, management is expecting company revenue growth in the low-to-mid-single-digit percent range and Adjusted EBITDA to be in the range of $1.10 billion to $1.18 billion. Continue to Buy.

Carl Delfeld, Chief Analyst for Cabot Explorer, updated International Business Machines (IBM), noting, “International Business Machines (IBM) shares were up 4.4% as the company is getting more attention as a quiet giant in artificial intelligence (AI). IBM has consistently led in AI research, with numerous AI patents and pioneering technologies in machine learning, natural language processing, and AI-driven analytics. In fact, the company filed for more AI-related patents than any other company in 2023. IBM’s book of business for AI has grown to more than two billion dollars since the launch of Watsonx and is a counterweight to more volatile tech growth stocks. Finally, IBM shares trade at just 2.8 times sales or 14 times free cash flow. Buy a Half.”

IBM posted second-quarter revenues of $15.8 billion (up 1.9% from 2Q 2023), net income of $1.83 billion (up 16%) and EPS of $1.99 (up from $1.74), which was 9% higher than analysts had predicted. Our shares are up 37%. Continue to Hold.

Chris also updated Gates Industrial (GTES), noting, “Earnings per share of 36 cents narrowly topped estimates of 35 cents and were flat year over year. Sales, however, fell just shy of estimates ($885.5 million vs. $893 million expected) and were down 5.4% year over year. The relatively ‘blah’ report—neither good nor overly bad—did little to dampen investor enthusiasm, at least initially, as GTES shares were up about 2% in early Wednesday trading and are up 3% since our last update.

“We now have a portfolio-best 67% gain on GTES. The stock still has 12% upside to our 20 price target. BUY”

Our shares in GTES are up 45%. I’m going to Hold the remainder of our shares for now.

Tom also reported on UnitedHealth Group Inc. (UNH), commenting, “The previously beleaguered healthcare insurance giant got a new lease on life. After wallowing in oblivion since seemingly forever, UNH soared about 20% since early July and made a new 52-week high. Earnings drove the stock. UnitedHealth beat earnings forecasts as it added more patients and pharmaceutical customers despite a continuing negative effect on profits from the February cyber-attack. UnitedHealth also reaffirmed previous guidance for 2024. The market is apparently happy and reassured. BUY”

The company reported earnings of around $7.9 billion in the second quarter on revenue of $98.9 billion (up 6.5% year over year). Key Optum divisions were the biggest growth drivers, with revenue from Optum Health and Optum Rx both growing by 13% year over year.

Continue to Buy.

Although shares of Novo Nordisk (NVO) have greatly benefited from its weight-loss drugs, analysts continue to believe there is much more potential ahead, citing new manufacturing on tap, as well as increasing applications for its drugs, including dementia, reduced kidney disease progression, and reduced cardiovascular risk in high-risk individuals. Buy on pullbacks.

Chris brought us up to date on Honda Motor Co. (HMC), noting, “After years of declining sales, Honda was rejuvenated in 2023 thanks to hybrids. The Japanese automaker sold 1.3 million cars last year, up 33% from 2022; a quarter of the cars it sold were hybrids, led by its popular CR-V sport utility vehicle (SUV) and Accord mid-size sedan. The CR-V was the best-selling hybrid in the U.S. last year, with 197,317 units sold. The Accord wasn’t far behind, with 96,323 sold. All told, Honda’s hybrid sales nearly tripled in 2023, to 294,000 units.

“So, Honda is making the full pivot to hybrids, with the Civic soon to become the latest addition to its hybrid fleet. Investors have started gravitating more to the companies that sell them.

“Among the hybrid-rejuvenated, brand-name automakers, Honda offers the best value.

“Honda reports earnings Wednesday, August 7. The Japanese automaker has grown sales by double digits in each of the last four quarters; a fifth straight quarter of double-digit gains would demonstrate the brand’s resilience in a tough global retail climate.

“HMC has 39% upside to our 45 price target. The stock remains dirt cheap, trading at less than 7x forward earnings, 0.39x sales and at just 62% of book value. The 4.6% dividend yield adds to the appeal. BUY”

The Nikkei newspaper said, “Japan’s Honda Motor will report consolidated first-quarter operating profit of more than 450 billion yen ($3.17 billion), boosted by strong U.S. hybrid vehicle sales.” Let’s continue to Hold for now.

Tyler updated his views on FTAI Aviation (FTAI), saying, “FTAI pulled back last week but got back in gear over the last few sessions. Airbus (EADSY) delivery expectations were recently cut due to supply chain issues, and this feeds perfectly into the FTAI story as the company specializes in engine maintenance and repair of engines for the Boeing 737 NG family and Airbus A320ceo family. Management recently took steps to internalize previously outsourced operations as well as to acquire the Lockheed Martin Commercial Engine Solutions (LMCES) from Lockheed Martin Canada. It’s a unique and still unknown story in the aerospace industry. Quarterly results come out next Tuesday. BUY”

Big-time investor Aaron Monroe of Diamond Hill Small Cap fund is a fan of FTAI—along with the top 3% of the more than 10,000 equity managers tracked by financial publisher Citywire, which just bestowed its highest AAA Elite Companies rating, on FTAI, based on the level of ownership by top stock pickers.

For its second quarter, FTAI’s loss from $2.18 per share on revenues of $443.6m (up 62% from 2Q 2023, and beating analysts’ estimates by 22%).

Looking to the future, the company is forecast to see 16% yearly revenue growth over the next three years. Continue to Buy.

Tom updated McKesson Corporation (MCK), noting, “After a rare pullback, the supply chain pharmaceutical company stock is right back in business and just made a new high this week. MCK is still very much in an uptrend that began after the pandemic and it’s up over 29% YTD. McKesson reports earnings next week and has already indicated earnings growth of 14% to 17% for this year. The pharmaceutical supply chain Goliath dominates a market that grows all by itself because of the aging population. Next week’s report should be another positive for MCK. BUY”

Wall Street expects EPS of $7.21 on revenues of $82.53 billion for its June quarter. Earnings will be released on August 7.

Meanwhile, MCK announced a 15% increase in its dividend, to $0.71 per share, the company’s eighth consecutive annual dividend increase. Continue to buy.

As to our most recent recommendation, Robinhood (HOOD), Mike Cintolo, Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader, advised his subscribers, “In the portfolio, we’re going to sell our half-sized position in Robinhood (HOOD), which is knifing below support today and is showing us our biggest loss... SELL HOOD.”

I agree. Sell.

Portfolio

*Aggressive (A), Moderate (M), Conservative (C)

ETF Strategies

Our ETF portfolio continues to shine, despite the market’s volatility. Last month, I recommended some portfolio allocations for you, depending on your age and risk profile. Last week, in my monthly magazine, I delved a bit deeper and also recommended a few sample portfolios, based on the same criteria. In case you haven’t seen that issue yet, here are my suggestions:

Ages 0-40

Aggressive Portfolio

Moderate Portfolio

Conservative Portfolio

Ages 41-60

Aggressive Portfolio

Moderate Portfolio

Conservative Portfolio

Ages 60+

Aggressive Portfolio

Moderate Portfolio

Conservative Portfolio

Until the market shakes off its jitters, I’m going to stick with our existing ETF portfolio. And these ETFs remain on our Watch List:

• Vanguard Small Cap Growth Index Fund (VBK)
• Midcap Growth ETF Vanguard (VOT)
• Total Intl Stock ETF Vanguard (VXUS)

And I’m adding a new column to our ETF section…

ETF Spotlight

This is a new section for our newsletter. Each month, I’m going to highlight one of our portfolio ETFs, showcasing its largest holdings and past returns so that you can decide if the ETF fits into your investment strategy.

iShares U.S. Healthcare ETF (IYH) is a 4-star-rated fund that focuses on large-cap stocks, weighted almost equally among value, blended, and growth equities. I consider it moderate risk and it can be held by investors of any age and most risk profiles.

The investment seeks to track the investment results of the Russell 1000 Health Care RIC 22.5/45 Capped Index composed of U.S. equities in the healthcare sector. The fund generally will invest at least 80% of its assets in the component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the component securities of its underlying index. The underlying index measures the performance of the healthcare sector of the U.S. equity market. The fund is non-diversified.

Top 10 Holdings

Returns

Cannabis Growth Offers Investors a New Frontier for Portfolio Appreciation

Like it or not (and I’m not taking sides here!), legalized cannabis is here to stay.

As you can see in the charts below, Cannabisindustry.org is predicting phenomenal growth for cannabis in the U.S. The U.S. market is projected to grow significantly. Retail cannabis sales could reach $53.5 billion by 2027, with adult-use sales growing more rapidly.

Recreational use in the U.S. began its legalization journey in 2012, starting with Colorado and Washington. And as Michael noted, so far, 38 states have legalized medical use, and 24 states have legalized rec use.

Besides the legal side of potential growth of cannabis, there are several additional catalysts to industry growth, according to Fortune Business Insights:

· Blockchain and AI will likely revolutionize supply chain management and compliance tracking.

· Product Innovation, such as personalized cannabis products (i.e., craft cannabis products and artisanal flower) is expected to gain traction as consumers become more educated and discerning.

· State-Level Changes: States like Maryland, possibly followed by Pennsylvania and Ohio, may influence regional market dynamics and tax structures.

· Ancillary services, such as the demand for specialized accounting solutions and advisory services.

· Canadian Market Resurgence: Canadian cannabis stocks may witness a revival, affecting cross-border financial transactions and investment strategies.

· Global Influence: Germany’s role as a market catalyst emphasizes the importance of understanding international financial regulations in the cannabis sector.

Globally, the cannabis market size was valued at $43.72 billion in 2022 and is projected to grow from $57.18 billion in 2023 to $444.34 billion by 2030, a CAGR of 34.03% during the forecast period.

North America leads the global market with a share of 81.79% in 2022.

The potential for the industry is incredible. And with Green Thumb already profitable and growing at double-digits … and undervalued, the stock looks very attractive.

However, you can expect continued volatility in the industry’s stocks. Due to this and its speculative nature, I consider this stock to be aggressive, so please add to your portfolio with that in mind.

ETF Portfolio

*Aggressive (A), Moderate (M), Conservative (C)

**Purchase price reflects a 3-for-1 stock split

The next Cabot Money Club Stock of the Month issue will be

published on September 12, 2024.

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