Cabot Early Opportunities Issue: April 17, 2024

Stocks in This Issue

Portfolio Updates

As has been my pattern lately, I’m going to focus this month’s intro on current position updates to try and help you keep in tune with the stocks you own heading into the Q1 earnings season.

FTAI Aviation (FTAI) looks terrific as there are considerable, long-term challenges in aircraft production helping to stoke demand in the company’s aftermarket business. Earnings will be out around April 25. Looking for revenue of $303.2 million (+3.6%) and EPS of $0.38 (+74%). BUY

Intuitive Surgical (ISRG) is about flat since we jumped in last month. Earnings this Thursday, April 18. Most of the focus is going to be on the launch of the next-gen Da Vinci 5 platform, features, improvements, surgeon excitement, etc. Expecting revenue of $1.87 billion (+10.3%) and EPS of $1.42 (+15.2%) but again, more focus on DV5 and the future there. BUY HALF

Leonardo DRS (DRS) held its first Investor Day in mid-March and I relayed the high-level details in last month’s Issue. Other than the release of a new combat vehicle computing platform it’s mostly been crickets since – not necessarily a bad thing but not much to talk about either. That will change on May 1 when earnings come out. We’re looking for revenue to grow by at least 13.5% to $645.6 million and EPS of $0.12 (+66%). The stock hasn’t been super strong but it’s holding up well enough to keep at buy. BUY

Microsoft (MSFT) has been very resilient near all-time highs and the April 24 earnings report should (hopefully) keep that trend alive. The news from this week is that the company has invested $1.5 billion in AI firm G42, which is based in the United Arab Emirates (UAE). Part of the interest in this deal is that it implies the UAE is backing away from working with China on AI and, instead, is strengthening ties with the U.S. BUY

Netflix (NFLX) continues to act well, partially because analysts are bumping up earnings expectations due to tailwinds from paid sharing. Look for the Q1 report this Thursday, April 18. Expectations currently suggest revenue grew 13.6% to $9.27 billion and EPS jumped 57% to $4.51. Keeping at buy, but obviously buying right ahead of an earnings report is a bit of a crapshoot short-term. BUY HALF

Rivian (RIVN) continues to be a dog in our portfolio as the news out of the EV market seems to get worse every day (Tesla layoffs this week, higher interest rates). It’s a bit odd to see this stock act so poorly when every week I see more Rivians out on the road and hear from people that absolutely love them. UBS sees potential – the firm just came out with an upgrade (sell to neutral) and some cautiously positive commentary, including some about potential for RIVN to rally and catch short sellers off guard. Earnings on May 7. BUY

SharkNinja (SN) has picked up new coverage with UBS initiating with at buy rating and 76 price target on Monday and JP Morgan starting with a 70 target on April 4. Who doesn’t love a new, small household appliance? Look for earnings in early May. Revenue is seen around $949 million and EPS at about $0.95, with full-year revenue growth of about 7.2%. BUY HALF

Soleno Therapeutics (SLNO) has been a frustrating stock to own lately though it’s not the only one in biotech land to be losing altitude. There’s just no news to keep the story fresh. We’re waiting for news of an NDA submission to the FDA for the company’s lead drug candidate, DCCR (Diazoxide Choline), for the potential treatment of Prader-Willi syndrome (PWS). PWS is a rare, genetic disease characterized by an insatiable desire to eat anything in sight. Commercialization plans are in the works. Small biotech stocks have a tendency to wander a bit but when good news strikes the upside move can erase all concerns. No guarantees of course, and it’s often boom or bust. Earnings should be out in the first two weeks of May. HOLD HALF

Vertiv Holdings (VRT) has been a beast and earnings will be out next Wednesday, April 24. The company is benefiting from major demand for its electrical and thermal equipment for data centers. It is a play on electric grid/AI investments. We’re looking for Q1 revenue to have grown by 6.5% to $1.62 billion and EPS of $0.36 (+49%). HOLD HALF

What to Do Now

Proceed cautiously, trim a few laggards and keep new positions on the smaller side.

The market’s momentum has faded with both the S&P 500 and Nasdaq falling below their 50-day lines on Monday. The culprit, once again, is pesky inflation and a bit of a pivot in Fed member commentary on pending rate cuts.

Expectations for a first cut have been pushed out to near the end of the year (if at all). The resulting jump in the 10-year yield (nearing 4.7%, up from 4.2% three weeks ago) is putting downward pressure on the market.

I’m not looking for a major correction. But a little softness after roughly five months of smooth sailing and some renewed macro concerns & conflicts suggests a little softness/bumpiness is entirely reasonable.

NEW STOCKS

Alamos Gold (AGI) ★ Top Pick ★

Gold and precious metals mining stocks are prone to major boom and bust cycles and lately, both have been on the run higher.

Whether you want to attribute the rise to concerns about inflation, sovereign debt, geopolitical risks, supply/demand dynamics or whatever conspiracy theory floats your boat, the reality is precious metals stocks are on the move and the average investor is beginning to notice.

We’ll get involved today with Alamos Gold (AGI), a solid, low-risk (relatively) Canadian gold exploration, development and mining company with projects in mining-friendly locations.

Alamos has three operating mines; the Young-Davidson and Island mines in Ontario, Canada and the Mulatos mine in Sonora State, Mexico.

It is also developing a number of new mining properties, including the Lynn Lake project in Manitoba, Canada (production expected in 2028), the Kirazlı, Ağı Dağı and Camyurt projects in Turkey and the Quartz Mountain project in Oregon, U.S.

In 2024 the company expects to produce around 505,000 ounces (oz) of gold at a cost of around $1,150/oz. (current price of gold is about $2,375/oz.). Alamos is an efficient producer with the potential to drive production costs down by about 10% over the next two years.

While the company’s current assets and production profile are attractive enough to drive shares higher during a gold stock rally, the recent acquisition of Argonaut Gold is a nice little sweetener.

The main attraction with Argonaut is its flagship Magino mine, located just 300 meters from Alamos’ Island gold mine in Ontario.

Magino just started producing gold last summer, has an estimated 19-year reserve life and a new mill with capacity for 10,000 tonnes per day (tpd) now, with expansion potential.

This mill is expected to become the central mill for an expanded complex, allowing Alamos to decommission the old Island mill and operate a much more efficient, new mill with capacity for both Magino and Island.

Big picture, the Argonaut acquisition likely adds about 10% to gold production this year (total estimated production of 550,000 oz.), ramping up to an additional 20% in 2026 (660,000 oz.) and just north of 800,000 oz. by 2029.

While the price of gold is a huge variable to forward revenue and EPS estimates (and overall gold stock performance), current best guess is Alamos delivers revenue of $1.36 billion this year (+33%) then grows by about 10% in 2025.

With Argonaut wrapped in and efficiency gains, EPS could jump 80% to almost $0.93 this year then grow between 10% and 15% in 2025.

The Stock
AGI has traded on the NYSE since 2004 so it’s been through several gold boom and bust cycles. Omitting the current rally, the last few periods of strength were in 2016, 2019-20 and late 2022 to mid-2023. The current rally followed a three-month drawdown (-25%) and began on March 1. It’s not a coincidence that AGI began to rally when the price of gold did. After the stock broke above 12 it paused just shy of 14 a couple weeks later, then rallied to the December 1 high of 15 at the end of March. Shares traded as high as 16 last week and closed just a hair below 15 yesterday. BUY

CAVA Group (CAVA)

We kicked the tires on CAVA Group (CAVA) last month, and with a little (but not too much) pullback in the stock, we’ll take a swing with a half position today.

Not much has changed with the story over the last month, though a number of analysts have upped their target prices. And there’s been some more work around potential winners and losers in the restaurant group due to changing behavior among GLP-1 (weight-loss drugs) users.

In the fast-casual space, surprise, surprise, Cava Grill is still seen as a potential beneficiary. Or at the very least, not likely to be too affected given its focus on healthier, Mediterranean food for the middle/higher-end consumer.

Other players with more indulgent menus (think burgers, wings, etc.) might face more challenges if GLP-1-driven changes in dining habits have legs.

Back to Cava Grill, to refresh your memory, the company was founded by a group of guys who knew each other from a young age and grew up with Mediterranean dining and traditions.

That history is featured prominently in the company’s marketing messaging (generosity, hospitality, warmth, healthy food and bold, satisfying flavors).

Prices for most bowls fall into the $11 to $17 range, lunch/dinner mix is about 55%/45%, slightly more than half of customers are female and, because of the brand and menu’s wide appeal, Cava Grill is a preferred tenant in many locations.

The company is growing steadily across the country.

In 2018 the company had 72 stores. Shortly before the IPO last May, it had 263 stores (the 2018 Zoes Kitchen added 145). At the end of 2023 total store count was up to 309 locations across 25 states.

CAVA plans to open 48 to 52 more this year.

Not only is the company on pace to grow locations by about 15% (or more) a year but it’s positioned to do so without going into net debt. That’s a big deal.

Look for revenue growth of around 20% this year ($873 million estimated) and EPS of roughly $0.24. Earnings should be out in late May.

The Stock
CAVA came public last May at 22 and doubled the first day. By August 2 the stock was trading near 58. That was a near-term top and shares sold off soon after, landing near 29 in October. Shares bounced around in the 30 – 38 range for a few months then shot up to 40 after lockup expiration in early December. CAVA touched 45 just before the end of the year, then worked through a little wobble in early January and another in mid-February on its way to an all-time high of 71.6, which it hit right at the end of March. Over the last two weeks, CAVA has pulled back to its 50-day line around 63.5, a buyable dip. BUY HALF

GoDaddy (GDDY)

There is a lot I could write about GoDaddy (GDDY), but the main reason I’m covering the company this month is the recent (ahead of schedule) launch of the company’s AI product “Airo” into its existing customer base.

I’ll get to details on that in a minute. First, the high-level review of the business.

GoDaddy’s main business is registering internet domain names and hosting websites. It’s one of the biggest players in that market.

There are a lot of different products and features that make a difference when entrepreneurs and businesses are deciding what domain/hosting company to work with. GoDaddy has just about everything that matters. Solutions range from website-building tools and templates, to privacy, domain transfer abilities, competitive pricing and more.

Behind the scenes, GoDaddy breaks its business into two segments. The larger segment, Core, generates around 66% of revenue (domain registrations, renewals, hosting, security, etc.) while Applications and Commerce (proprietary software, third-party email, productivity, commerce and specialty solutions) make up the balance.

It’s now a slow but steady and profitable growth business. Revenue was up 4% to $4.25 billion in 2023 while EPS jumped to $9.20.

Current estimates suggest revenue will accelerate to just over 6% this year then 7% in 2025.

One of the wild cards that could move the needle and isn’t yet priced into estimates – largely because it’s being included in current products and not yet charged for separately – is GoDaddy’s new AI product, Airo.

The tool is specifically aimed at helping customers, including a lot of entrepreneurs and solo creators, get their websites up and running faster. One of the challenges to this group is that they have an idea or concept for a business but get stumped when trying to implement it.

Specifically for the solo creators, Airo supposedly helps a ton in the creative process. It can help choose a domain name, select a website template and create the site, write text, synch marketing schedules across social media platforms and create social media captions.

Help overcoming these barriers is potentially huge.

For somewhat larger customers focused on e-commerce, Airo helps address three pain points: managing real-time inventory, online ordering and tip management.

Last year GoDaddy ran a survey and found only 11% of respondents had used generative AI tools. That number today is north of 70%.

You don’t need to be a data scientist to understand that a more engaged customer base and AI tools to create better websites faster should be good for GoDaddy.

Airo has been in development for over a year, had a soft launch in November 2023 and fully launched in late March. It will be included in the A&C segment, but thus far nothing is baked into revenue expectations this year.

Given the potential for that to change when management reports in early May, we’ll step in with a half-sized position today.

The Stock
GDDY came public in 2015 at 20 and had a good early run. Shares didn’t stop rallying until they got into the mid-80s in late 2018. Then came a roughly five-year period when the stock didn’t make any sustainable upside progress, though it avoided most of the truly harsh drawdowns affecting most other growthy names. Still, it wasn’t until recently that GDDY broke out of the roughly 64 – 90 trading range that persisted since mid-2020. The change of character followed the November 2 earnings report, after which GDDY jumped 14% to a new all-time high above 85 then kept running north of 100. There was a little soft spot in January, but momentum picked up again until GDDY hit 127 last week. The current little dip to the stock’s 25-day moving average line is where we’ll step in. BUY HALF

Kaspi.kz (KSPI)

Kaspi.kz (KSPI) is one of the biggest and most interesting international IPOs (January 2024) of the last few years. Until last week it was also a very hot stock. With shares acting volatile (to the downside lately, partially due to flooding in the country) we’ll start by getting familiar with the story and putting KSPI on our Watch List.

The company operates a suite of integrated mobile applications that come together into a two-sided Super App that’s become hugely popular in Kazakhstan.

There is the Kaspi.kz Super App for consumers, and the Kaspi Pay Super App for merchants and entrepreneurs.

Kazakhstan is an off-the-beaten-path, landlocked country in Central Asia that shares borders with parts of Turkmenistan, Uzbekistan and Kyrgyzstan to the south, Russia to the north and China to the east.

The U.S. Department of State has designated Kazakhstan a Level 1 country, meaning it’s among the safest in the world. But it is rural, boasting one of the lowest population densities around.

Kaspi’s mobile app helps tie things together. It’s estimated that it has over 13.5 million monthly average users (MAUs) and that over 90% of the adult population uses the platform in some way.

It offers an integrated ecosystem of payments, marketplace and fintech. These symbiotic offerings interact to drive higher use across the platform. Higher engagement with marketplace offerings drives higher payments, more sellers on the platform drive wider marketplace offerings, etc.

Marketplace services are extensive, with Kaspi offering m-Commerce (offline purchases) like health, beauty and entertainment, e-Commerce, grocery delivery (e-Grocery), travel, advertising and logistics.

While the Super App is very popular, e-Commerce in Kazakhstan hovers around just 10%. That’s a fraction of what it is in the U.S. (25%) and China (32%), implying long-term growth potential.

Payment services are the foundation of the business model, with roughly 90% of all monthly average users (MAUs) active. Business-to-consumer (B2C) payments have been the biggest grower (estimated market share nearing 70%) but business-to-business (B2B) use is trending higher as well.

Fintech helps to support marketplace purchases with services like buy now, pay later (BNPL), business financing and auto financing.

Growth has been impressive. Revenue was up 54% in 2022 and 45% in 2023, when EPS grew by a similar amount to $9.76.

Consensus estimates suggest revenue will expand by about 20% this year and next, while EPS growth should be in the mid-20% range. That said, there’s a good degree of variability in expectations.

Kaspi.kz is set to report next Monday.

The Stock
KSPI’s U.S. American Depository Shares (ADS) began trading at 92 on January 19. Things were uneventful at first then the stock ran up to 100 before the Q1 report on February 26, after which the rally gained momentum. KSPI traded higher almost every single session through April 3, when it peaked at 136. The stock has fallen sharply over the last two weeks, and KSPI closed yesterday just above its 50-day moving average line at 110. It’s an interesting story and a great growth profile for those with some risk tolerance and desire for international exposure. With earnings coming up and the stock still fresh to the market, we’ll put KSPI on our Watch List for now. WATCH

Tidewater (TDW)

Investor attention has drifted back toward energy stocks with the rise in the price of crude oil.

We’ll keep an eye on the space with Tidewater (TDW), an oil & gas services company that specializes in providing support to the offshore oil & gas and wind industries, one of the strongest areas of the global drilling and completion market.

Tidewater is a global company, operating in all major offshore regions around the globe, including Europe, West Africa, the Middle East, Americas and APAC.

It has a fleet of 195 Offshore Support Vessels (OSVs) and another 22 crew boats, maintenance vessels and tugboats.

Depending on the design, its vessels are designed to bring cargo, cement, fluids, drill pipe, etc., to offshore oil and gas platforms, assist with towing and anchor handling activities, transport personnel, tow floating rigs and barges, and handle specialty services, like crane operations or subsea services.

The company has been on a mission to upgrade its fleet. Over the last 18 months, Tidewater has added 85 vessels through M&A (Swire Pacific Offshore and Solstad Offshore ASA), most of which are larger vessels over 700 square meters.

Not surprisingly, these larger vessels have a higher day rate than smaller ones. And rates have been rising.

In 2023 leading edge day rates rose by 40% to end the year at $29,500, reversing the soft pricing trend that hit hard in 2016 and lasted through the end of 2021.

Management sees that trend continuing into 2024, helping push margins higher. The latest guidance calls for 2024 revenue of $1.43 billion (+41%) with EBITDA margin jumping 700 basis points to 45%. Analysts figure that translates into EPS of $5.16 (+180%).

Granted, some of this year’s growth is due to acquisitions, but the bottom line remains that Tidewater operates in a very strong area of the energy market where prices for its services are going up (especially in deepwater) and shipyard capacity and newbuild orders are going down (i.e., less competing supply of ships coming to market).

The Stock
TDW began trading on the NYSE in mid-2017 and did fine until the energy market began to fall apart in 2018. In early 2020 shares were trading for under 5. But the post-pandemic performance has been much better. TDW moved above 20 in the spring of 2022, and since October of that year, shares have mostly shown a pattern of higher lows and higher highs on the weekly chart. There was a soft patch in November 2023 when TDW fell from 72 to the mid-50s (after the Q3 earnings report) but the stock toyed with new highs in the months afterward then broke out above 80 on March 1 after Q4 earnings. TDW has since walked steadily up to 100. With a little weakness in energy stocks right now, we’ll start by putting TDW on our Watch List. WATCH

PORTFOLIO CHANGES SINCE LAST ISSUE

On March 26 we sold our half stake in Varonis (VRNS) for a gain of 24% in just four months. This Monday (April 15) we sold Cadre Holdings (CDRE) for a modest loss of 6% and Crocs (CROX) for a gain of 21% in four months.

These sales bring our total positions sold in 2024 to 14, with twelve sold at a profit (86% win ratio). It’s been a good market.

On April 10 Soleno Therapeutics (SLNO) was moved to hold.

An updated table of all stocks rated BUY, HOLD and WATCH as well as recent stocks SOLD, is included below.

Please note that stocks rated BUY are suitable for purchasing now. In all cases, and especially recent IPOs, I suggest averaging into every stock to spread out your cost basis.

For stocks rated BUY A HALF, you should average into a position size that’s roughly half the dollar value of your typical position. We may do this when stocks have little trading history (for instance, IPOs), when there is more uncertainty in the market or with a stock than normal, or if a stock has recently jumped higher.

Those rated HOLD are stocks that still look good and are recommended to be kept in a long-term-oriented portfolio. Or they’ve pulled back a little and are under consideration for being dropped.

Stocks rated SOLD didn’t pan out, or the uptrend has run its course for the time being. They should be sold if you own them. SOLD stocks are listed in one monthly Issue, then they fall off the SOLD list.

Please use this list to keep up with my latest thinking, and don’t hesitate to email with any questions.

Active Positions

Recently Sold Positions

The next issue of Cabot Early Opportunities will be published on May 15, 2024.

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