Cabot Stock of the Month Issue: November 14, 2024

Market Review

The markets reacted strongly—and bullishly—to the results of the presidential election and also found favor after the Federal Reserve’s quarter-point rate reduction.

As of today, they’ve pulled back a bit, awaiting the latest inflation report.

However, the economy continues rolling along. Unemployment remains steady, and consumer sentiment is positive. And while the housing market continues to be challenged by low inventory and rising prices, on the local level, I’m seeing improvement in both categories.

Growth stocks continue to outpace Value, with large caps gaining 31.44% year to date, midcaps up 26.28%, and small caps up 24.34%. Yet, Value stocks are more than holding their own, with large caps rising 18.87%, midcaps, 18.26%, and small caps, 16.37%.

Sector-wise, the top three gainers for 2024 are Communication Services (+33.11%), Financial Services (+32.69%), and Industrial (+25.62%). But the laggards are also in the black with Basic Materials gaining 9.96%, Healthcare, 9.47%, and Real Estate, 8.66%.

I’m pretty bullish for 2025, but I also believe in judicious choices in the market—not the dartboard approach.

And as the small-cap universe appears to be building momentum, I’m taking advantage of that action and adding a diversified micro-cap fund to our portfolio this month.

Feature Recommendation

Every year at this time, I start thinking about which market sectors look ripe for investing in the coming new year. And as you know, growth stocks have been the market leaders for some time, with large caps and midcaps showing up their smaller-cap brethren. But, with the bull market going strong, small caps seem to be roaring back.

With that in mind, I asked Carl Delfeld, Chief Analyst of Cabot Explorer, for a fund idea that would provide diversification as well as the opportunity to invest in small-cap stocks. Here’s what Carl had to say:

“Right now, I would go with Oberweis Micro-Cap Fund (OBMCX), which stands out for several reasons. The fund’s sound investment process and strong management team earn it a rare Morningstar Medalist Rating of Gold. Over the past five years, it has posted an impressive average annual return of 18.9%.”

Oberweis Micro-Cap Fund (OBMCX): A Play on the Rising Small-Cap Sector

Recommended by Carl Delfeld, Chief Analyst, Cabot Explorer

“There are many small-cap and micro-cap funds and ETFs on the market, but the Oberweis Micro-Cap Fund (OBMCX) stands out for several reasons.

“No wonder the fund’s long-term absolute return track record is outstanding. Over the past five years, it has posted an impressive average annual return of 18.9%. Over the past decade, it has outperformed its benchmark by an annualized (and unheard of) 6.1 percentage points and beaten its average peer by an annualized 5.6 percentage points over the same 10-year period.

“I also like that it has a rather concentrated portfolio of just 60 to 100 stocks with its top 10 stocks accounting for 29% of total assets. This is a sign of conviction and confidence.

“Finally, in an investment world dominated by tech, this fund’s sector concentrations are balanced, with materials and processing at 28% and industrial and information technology both at 22% weightings.

“I encourage you to add this to your portfolio. Buy a Half”

Oberweis Micro-Cap Fund is rated 5 stars by Morningstar and is characterized as High risk/high return. Its expense ratio is 1.53%.

Investment in U.S. equities: 84.02%

Investment in foreign equities: 12.76%

Sector Investments

Although the fund’s expense ratio does look a bit high, its fabulous returns have more than made up for it (more to come about this in the last section of this newsletter).

About the Analyst: Carl Delfeld, Cabot Explorer

Carl received his Master’s in Law and Diplomacy at the Tufts Fletcher School; worked for the First National Bank of Boston (now Bank of America) in London, serving as director of the Japan and South Korea Group; served as vice president at the investment bank Robert W. Baird & Company, developing new business in Tokyo, Hong Kong and Sydney; was Asia advisor to the U.S. Congressional Joint Economic Committee, the U.S. Finance Committee and the U.S. Department of the Treasury; wrote for Forbes Asia and the Far Eastern Economic Review; served as a member on the U.S. National Committee on Pacific Economic Cooperation and the Japan-U.S. Friendship Commission; was chairman of the Asian Pension Forum.

Books Carl has written include:

Power Rivals: America and China’s Superpower Struggle.

Red, White and Bold: The New American Century Paperback,

Think Global, Grow Rich: 7 Principles for Building a Global Portfolio,

The New Global Investor: Using ETFs to Build Smarter, Simpler and Safer Portfolios

Here is our interview:

Nancy: You have long been an expert on international stocks, so I’d love to hear your views on emerging markets right now. In an October report from Lazard, it was noted that emerging market stocks “outperformed developed markets (DM) equities in the past quarter, gaining 8.7% versus 6.4%. This marked two consecutive quarters of EM outperformance for the first time since 2020.” The report went on to say that the firm expected EM stocks to gain almost 16% next year. Do you agree/disagree, and why?

Carl: I do believe that EM stocks will have a good year largely based on the fact that they are cheaper than developed markets. The stronger U.S. dollar will also boost their exports.

Nancy: In the same report, the study said that Asian stocks outperformed their EM peers. I guess, depending on who wins the election tomorrow, your viewpoint may change (due to possible tariffs), but taking that into account, do you have some projections for how you think Asian stocks will perform next year?

Carl: It is really more country by country and company by company rather than on a regional basis. Japan is facing some challenges, but my favorite (and my focus) remains Southeast Asia, which is being courted by both sides of the U.S.-China rivalry.

Nancy: In a recent issue of your newsletter, you had an interesting point of view on the increasing capital outflows from investors in China. Would you please elaborate on that issue for my subscribers, and how you think it will affect Chinese equities?

Carl: I remain a skeptic on China, but the caveat is that Chinese stocks are extremely cheap, and Beijing can spark a rally at any time with government action.

Rather than China, I would look to Europe.

Spain is aggressively reaching out to China for more trade and investment, but Spain’s economic ties with the United States are much larger than between Spain and China, so the country must tread carefully. The risk is that cars produced with Chinese partners or technology could be shut out of the American market.

Still, Spain has emerged as the star of the European Union with its highest economic growth rate as Germany and France have struggled a bit.

One of the best conservative ways to capture growth in a country or region is through top-quality banks due to their tentacles at home and overseas. First, you need to sort out the laggards from the quality banks that have upside potential and strong track records.

You may have never heard of Santander Bank (SAN), founded in 1857 in Spain.

The bank’s U.S. headquarters is in Boston, but its strength lies in Latin America and Europe where it has more than 8,000 branches with 171 million customers as well as 58 million digital accounts. In the second quarter, it welcomed over 4 million new customers compared to the previous year. About 55% of deposits and loans are in Europe with the balance in Latin America.

Nancy: Your Cabot Explorer portfolio is nicely diversified among several sectors and industries—tech, e-commerce, industrial, energy, even coffee shops. With that in mind, which sectors might you be exploring in the new year?

Carl: I continue to like nuclear power, defense, biotech, cyber security, and alternative assets such as Bitcoin and gold. Centrus Energy (LEU) shares have done extremely well. Interest in nuclear energy is increasing with new technology and the AI needs for powerful data centers. Nuclear energy now accounts for about 75% of low-emission energy in the United States.

Nancy: Your portfolio also includes a number of exchange-traded funds (ETFs), and I know that you have an extensive track record of choosing very successful funds. Would you please share some of your insights into what you are looking for when selecting a fund?

Carl: With ETFs, I first identify a sector or asset class I like looking for a blend of value and growth. The first step is to identify channels of accelerating and lasting growth.

Some of the trends we keep an eye on include global energy, the U.S.-China rivalry, the global battle for resources, cloud computing, health and nutrition, and infrastructure.

Sometimes the first movers have the edge, but companies that come later with scale and capital can vault to the head of these channels of growth.

The adage, “The trend is your friend” is a good one to keep in mind. But sometimes markets overreact and quality companies posting strong revenue and profit numbers can be suddenly trading at “value” prices.

And while it’s true that some of the greatest investment ideas come at the extremes of deep value and high growth, it’s usually smarter and safer to play the middle of the field.

We also work hard to avoid investing in trends and companies that are running out of steam or facing strong headwinds that will likely slow growth and profitability. In international and especially emerging markets, political change can be an important factor in successful investing.

Great bull markets often start with economic, free market and political reforms, and investors can make a killing if they come to the party early.

I don’t have a typical holding period, but I advise against short-term trading with ETFs while still being open to rotating into new sectors that show upside potential.

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Portfolio Updates

Tom Hutchinson, Chief Analyst of Cabot Dividend Investor, updated his views on Qualcomm Inc. (QCOM), saying, “This semiconductor giant stock continues to bounce around with no clear direction. It is currently down nearly 30% from the 52-week high. But the stock has leveled off over the last two months and QCOM is still up 17% YTD. Qualcomm is still very well-positioned ahead of the next wave of AI, which should be in mobile devices. The jury is still out on the earnings quarter with respect to AI stocks. Qualcomm reports earnings this week. After this week, we should have a better idea if QCOM will get a bump soon or we will have to wait longer. BUY”

Indeed, QCOM reported its fiscal fourth quarter, and the results showed progress. Revenue rose 9% YoY to $10.24 billion, beating analysts’ estimates, and earnings per share grew to $2.59 per share, almost twice last year’s $1.23 per share.

Analysts were pleased by the company’s continued diversification efforts in its chip business and its guidance for this quarter—revenue between $10.5 billion and $11.3 billion, with automotive sales expected to rise 50% YoY, and GAAP earnings of $2.39-$2.59 per share.

Following the earnings report, Bernstein raised QCOM’s price target to 215. Buy

Tom also reviewed Brookfield Infrastructure Partners (BIP), commenting, “This infrastructure behemoth is finally getting some lasting upside traction. BIPC hit a new 52-week high this month. After struggling mightily for what seemed like forever, BIP is up over 35% since the middle of April. This unique utility had been a stellar performer for many years prior to inflation and rising interest rates. But now interest rates have peaked and are highly likely to trend lower in the quarters and years ahead. Brookfield is also highly recession-resistant should that come about. The partnership reports earnings this week. (This security generates a K1 form at tax time). BUY”

Since 2016, Brookfield has grown its funds from operations (FFO) per share at a 12% compound annual rate and is expected to repeat that growth over the next decade.

For its third quarter, BIPC reported funds from operations of $599 million, or 76 cents per share, and revenue of $5.27 billion. Continue to Buy.

UnitedHealth Group Inc. (UNH) is also one of Tom’s recommendations. In a recent update, he noted, “The health insurance behemoth stock had a nice move higher since July. But it has been a sideways slog since. UNH stumbled earlier this month after reporting earnings that the market didn’t like. UnitedHealth shares plunged after the company’s forecasts for 2024 and 2025 fell short of investors’ expectations. The numbers are only slightly below what was expected, and this company tends to outperform forecasts. But the company cited higher medical expenses and stricter federal reimbursement levels for the shortfall. But UNH has stopped falling and it has leveled off. BUY”

The shares of UNH are getting some serious love from an institutional investor, Legacy Capital Wealth Partners LLC, who reported that it had boosted its stake in UNH by 88% during the third quarter, which increased its holdings to 7,422 shares valued at $4.34 million.

For the third quarter, UNH reported its revenue rose 9.2%, to $100.8 billion, thus beating forecasts. EPS was $7.15, $0.15 higher than forecasts.

Macroview Investment Management Company increased its stake in the company by 671% in the last quarter.

Analysts expect that the company’s earnings will rise by more than 12% annually for the next three to five years. Management predicts its EPS will come in at $27.50 to $27.75 for 2024 and net EPS is forecast to be $15.50-$15.75.

And its board of directors just announced a cash dividend of $2.10 per share, to be paid on December 17, 2024. Continue to Buy.

Another Cabot Dividend Investor recommendation, McKesson Corporation (MCK), was also reviewed by Tom, who said, “It’s been a rough three months for this one. MCK had fallen over 20% from the early August high. Unfortunately, supply issues with Novo Nordisk’s (NVO) weight-loss drug are a problem for this pharmaceutical supply chain company. Earnings disappointed with lower-than-expected revenues last quarter and the company cited weight-loss drug supplies that couldn’t keep up with demand as the main cause. A recent report indicates that it could be more of the same for McKesson in this quarter. Fears of this quarter’s earnings have kept MCK down. Those earnings will be reported this week. It could get a relief rally if they aren’t as bad as expected. MCK has already bottomed out and moved 9% higher over the last month. BUY”

Wall Street is expecting McKesson’s EPS to rise by 18.2% this year, almost two and a half times what the industry is expected to report.

And it’s on its way. McKesson Corporation reported second-quarter fiscal 2025 with adjusted earnings per share of $7.07, beating analysts’ estimates by 2.6%. Revenues also beat (by 4.7%), coming in at $93.65 billion. Continue to Buy.

Curaleaf (CURLF) was updated by Michael Brush, Chief Analyst, Cabot Cannabis Investor, who noted, “Curaleaf has opened a new store in Miami, taking its Florida store count to 66 and its overall U.S. store count to 151. Buy”

Curaleaf Holdings posted third-quarter results, reporting revenue of $330.5 million (flat on 3Q 2023) with a net loss of $0.057 loss per share, an improvement from a loss of $0.096 loss last year. Both top and bottom lines were less than Wall Street expected, but for the next three years, analysts are forecasting annual revenue growth of 14%. Normally, I would cut our losses at this point, but as Michael is still a believer in the stock, I’m going to Continue to Hold for a while.

Michael also updated his view on Green Thumb (GTBIF), saying, “Green Thumb is teaming up with New York City’s popular Magnolia Bakery to offer edibles sold under the cannabis company’s Incredibles brand. The partnership will feature THC-infused banana pudding and red velvet cake bars. The products will be available at RISE stores in New York and New Jersey, and online. Buy”

Green Thumb Industries reported its quarterly earnings of $0.04 per share, on revenues of $287 million (up 4% year over year). Buy

Tyler Laundon, Chief Analyst of Cabot Small-Cap Confidential and Cabot Early Opportunities issued a Sell alert on TransMedics Group (TMDX) after the company reported a disappointing quarter. SOLD FINAL QUARTER.”

I agree; we’ve had some fantastic profits in this stock. Let’s continue to cash in and Sell your remaining quarter.

Tyler also updated his recommendation of FTAI Aviation (FTAI), noting the company “Continues to benefit from supply chain disruptions in the aerospace engine market. When Boeing (BA) says it will be handing out thousands of pink slips and raising money to ‘increase financial flexibility,’ you know the aerospace market is messed up. FTAI is benefitting. Earnings are out on October 30. Moving to hold after a heck of a run (we’re up over 130%). HOLD”

FTAI’s third-quarter results were excellent. The company reported revenues of $465.8 million (up 60% from 3Q 2023) and EPS of $0.76 (up from US$0.33 in 3Q 2023). We have already profited from selling one-half our shares. Let’s Continue to hold the remaining shares (which are up more than 100%).

Another sell recommendation comes from Chris Preston, Chief Analyst, Cabot Value Investor. Chris recommended that his subscribers sell Gates Industrial Corp. plc (GTES), as it reached his price target. We took a 50% gain on half of our shares already; so, let’s cash in on the 87% return on our remaining shares. Sell

Chris also recommended the sale of Honda Motor Co. (HMC), saying the company “Had a bad earnings report, with profits down 20% in the first half of its fiscal year. Car sales in Asia tumbled, with sales in China particularly struggling. Meanwhile, the Japanese automaker lowered its full-year profit forecast by $330 million, to $6.2 billion—lower than the $7.2 billion in profits the company earned last year. Yikes.

“That grim earnings report, out yesterday, not only knocked HMC back 9% to a new 52-week low at 27 but changed our entire calculus. This was a growth-at-value-prices pick … and Honda is no longer growing. HMC has long been the one true laggard in our portfolio, and yesterday’s report and subsequent selloff make this an easy decision. Let’s sell HMC shares and open up another spot down the road in our Growth/Income Portfolio. MOVE FROM BUY TO SELL.”

I agree. Sell

Chris updated our latest recommendation, Toll Brothers (TOL), commenting, “There was no company-specific news for Toll Brothers this week. Shares were off a little more than 1%, including a 4% pullback on Wednesday. Perhaps today’s latest Fed rate cut will quickly right the ship for TOL shares. We still have a solid gain on it, and eventually, both interest and mortgage rates will start to fall; TOL—along with other homebuilder stocks—will begin to rise again. TOL shares have 22% upside to our 180 price target. BUY”

According to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence in the market for newly built single-family homes rose to 43 in October, an increase of two points from September’s reading of 41.

Earnings for Toll Brothers are due on December 3, 2024. EPS is forecast at $4.34 on revenues of $3.17 billion. Continue to Buy.

Carl Delfeld reviewed his recommendation of International Business Machines (IBM), noting, “Shares were up 4.2% this week and have handily beat the S&P 500 so far this year. Recently, IBM reported third-quarter results with double-digit revenue growth in software and offers us exposure to cloud computing, data analytics, cybersecurity, and artificial intelligence (AI) with the latter business tripling in the June quarter of this year, from $1 billion to $3 billion. Buy a Half”

For IBM’s third quarter, the company reported revenues of $15.0 billion (up 1.5% from 3Q 2023), with a loss of $0.34 per share (down from US$1.88 profit in 3Q 2023).

Looking forward, analysts expect revenues to rise by 4.2% annually over the next three years, based on its expanding AI business (now at $3 billion).

The shares retracted after the report. Let’s continue to Hold our remaining shares for now.

Novo Nordisk (NVO) shares declined after its third-quarter report. For the first nine months of 2024, Novo had sales of $29.4 billion, 23% higher than the previous year, boosted by a 44% gain in its obesity drugs segment. But for the third quarter, revenues of $10.2 billion were a bit less than Wall Street had predicted. And future guidance of sales growth of 23%-27% was slightly off its previous forecasts.

Although demand is still robust, it’s normal that sales would eventually soften a bit, especially after their steep climb. However, this week, the company hinted that it may have a potential Ozempic successor in mind. That sounds promising to me. The shares are now trading at a discount, so I recommend we Continue to Buy.

Another sale was recommended by Clif Droke, Chief Analyst of Cabot Turnaround Letter, noting, “Not long ago I said that I would wait for a rally before pulling the trigger on a sell for Tyson Foods (TSN), and here we are, so I’m placing Tyson on a Sell as of Friday. The poultry processor is still up 15% from last year’s original purchase price, but given the headwinds the company is currently facing in beef, chicken and pork prices, I think this is as good a time as any to take profits and exit the position. Sell”

I agree. Sell

Portfolio

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

ETF Strategies

Our ETF portfolio is still going strong, and these ETFs remain on our Watch List:

• Vanguard Small Cap Growth Index Fund (VBK)
• Vanguard Midcap Growth ETF (VOT)

I may be adding one or both of these to our portfolio in the next week or so. So, stay tuned for any alerts.

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.

Adaptive Growth Opportunities ETF (AGOX) is a five-star-rated fund. The fund’s portfolio manager seeks to achieve its investment objective of capital appreciation by investing in ETFs that are registered under the Investment Company Act of 1940, as amended and not affiliated with the fund that invest in equity securities of any market capitalization of issuers from a number of countries throughout the world, including emerging market countries. The fixed-income securities in which the fund will invest will be investment grade and may be of any duration or maturity.

Top 10 Holdings

Returns

The Election Is Boosting the Bull Market!

We’ve had a great bull market—for the most part—this year, and the election has seemed to increase investor interest, especially in financial and technology stocks.

And I think that bodes well for our latest recommendation, Oberweis Micro-Cap Fund (OBMCX).

The following table depicts the companies that make up the top ten holdings in the fund, diversified into the sectors that look particularly attractive for 2025.

Top 10 Holdings

And as I mentioned earlier, although the expense ratio is a bit pricy, the returns have been stellar.

Trailing Returns

The top three companies in the fund are concentrated in the Healthcare, Tech, and Industrial sectors.

ADMA Biologics, Inc. (ADMA), a biopharmaceutical company, engages in developing, manufacturing, and marketing specialty plasma-derived biologics for the treatment of immune deficiencies and infectious diseases in the United States and internationally. The company offers BIVIGAM, an intravenous immune globulin (IVIG) product indicated for the treatment of primary humoral immunodeficiency (PI); ASCENIV, an IVIG product for the treatment of PI; and Nabi-HB for the treatment of acute exposure to blood containing Hepatitis B surface antigen and other listed exposures to Hepatitis B. It develops a pipeline of plasma-derived therapeutics, including products related to the methods of treatment and prevention of S. pneumonia infection for an immunoglobulin. In addition, it operates source plasma collection facilities. The company sells its products through independent distributors, drug wholesalers, specialty pharmacies, and other alternate site providers. ADMA Biologics, Inc. was incorporated in 2004 and is headquartered in Ramsey, New Jersey.

Camtek Ltd. (CAMT), together with its subsidiaries, develops, manufactures, and sells inspection and metrology equipment for semiconductor industry. The company provides Eagle-i, a system that delivers 2D inspection and metrology capabilities; Eagle-AP, which addresses the advanced packaging market using software and hardware technologies that deliver superior 2D and 3D inspection and metrology capabilities on the same platform; and Golden Eagle, a panel inspection and metrology system to address the challenges fanout wafer level packaging applications. It also develops automatic defect classification, which provides automatic defect classification of color images utilizing deep learning techniques to reduce and eliminate manual verification. In addition, the company offers MicroProf AP, a wafer metrology tool for applications at 3D packaging process steps; MicroProf DI, an optical inspection tool that enables inspection of structured and unstructured wafers for manufacturing process; MicroProf FE, a 2D/3D wafer metrology tool that serve front end HVM fab; MicroProf FS, an wafer metrology tool configurable for wafer foundry; MicroProf PT for hybrid metrology applications to common panel sizes; MicroProf MHU metrology tool, a material handling unit for semiconductor, MEMS, sapphire, and LED industries; MicroProf TL, an optical surface measurement tool for fully automatic 3D surface measurements; MicroProf 100, a universal surface metrology tool for determination of topography and film and sample thickness; MicroProf 200, a measuring device for contactless and non-destructive characterization of surfaces and films; and MicroProf 300, a SurfaceSens technology for quality assurance, development, and manufacturing. It serves semiconductor manufacturers, outsourced semiconductor assembly and test, integrated device manufacturers, and wafer level packaging subcontractors. Camtek Ltd. was incorporated in 1987 and is headquartered in Migdal Haemek, Israel.

Blue Bird Corporation (BLBD), together with its subsidiaries, designs, engineers, manufactures, and sells school buses in the United States, Canada, and internationally. The company operates through two segments, Bus and Parts. It offers Type C, Type D, and specialty buses; and alternative power options through its propane powered, gasoline powered, compressed natural gas powered, and electric powered school buses, as well as diesel engines. The company also sells replacement bus parts; and provides financing services and extended warranties related to its products. Blue Bird Corporation sells its products through drop ship and a network of dealers, as well as directly to fleet operators, the United States government, and state governments; independent service centers; and maintains a parts distribution center. Blue Bird Corporation was founded in 1927 and is headquartered in Macon, Georgia.

I consider this fund to be aggressive risk. Buy

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 December 21, 2024.

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