Cabot Early Opportunities Issue: March 26, 2025

Stocks in This Issue

Crisis of Confidence

In my March 14 Special Bulletin, I wrote that the disruptive governing style of Trump 2.0 has created a great deal of uncertainty, raised the odds of a recession, inspired some analysts to slash their growth outlooks and led to a correction in the equity markets.

The latest reading of the Consumer Confidence Index (CCI), from March, shows clear as day that Americans are getting worried.

The data release came out yesterday morning. It showed that consumers’ short-term outlook for income, business and labor market conditions – the Expectations Index – tumbled to a 12-year low of 65.2 in March.

That’s well below the threshold of 80 that typically signals a recession is coming.

Ugh.

There are, of course, details in the data that are highly relevant.

For example, the drop in confidence was driven by consumers over 5 and those between 35 and 55. People of these ages are much more likely to be watching the stock market, which did poorly in early March.

Inflation expectations rose, and a lot more people expected stock prices to fall in the year ahead (45% to be exact, up from just 22% in November). Only 37% expected stock prices to rise.

The silver lining here may be that the extreme negative reading largely reflects concerns about what might happen, not what actually has happened.

Consumers’ assessment of current business and labor market conditions – the Present Situation Index – fell by a more modest 3.6 points to 134.5. That’s not a bad reading.

Another silver lining may be that such dives in confidence tend to coincide with bearish market sentiment, and that can be a contrarian buy signal.

But that’s not always the case.

And, at least for now, we still have an administration hell-bent on disrupting things and a Fed that, while open to cutting, isn’t likely to do so until the impacts of tariffs on inflation are better known.

In other words, it’s entirely reasonable that there has been a crisis of confidence among consumers.

It’s a weird time. Made especially more so given how high expectations were at the beginning of 2025 when the consensus was that we’d have a market-friendly administration at the helm.

What to Do Now

Last month I said, “I’m a little concerned that, once earnings season excitement fades, it will be harder to ignore the noise, and that could drive some market volatility. That’s not a prediction, just something that’s on my mind. And part of why our current strategy should be to add select exposure and not get overly aggressive.”

My concerns were proven to be valid. And while the market has firmed up over the last week or so, the Trump administration isn’t likely to change tactics in a major way in the near term.

Next up, in early April, is the next round of tariff discussions. I’m not even going to try to predict how this will go!

So, while we’ll do a little buying today, “proceed cautiously” is still the best way forward in my view.

NEW STOCKS

Carpenter Technology (CRS)

Carpenter Technology (CRS) is a premier producer and distributor of high-performance specialty alloys, including titanium alloys, powder metals, stainless steels, alloy steels, and tool steels.

The company supplies high-value, non-commodity materials and process solutions to the aerospace and defense (A&D) sector (over 60% of revenue), as well as to the medical (~13% of revenue), energy, transportation, industrial, and consumer markets.

Carpenter operates a global network of service and distribution centers across the U.S., Canada, Mexico, Europe, and Asia. This gives the company significant control over its supply chain and customer relationships, a strategic advantage that has made the company an indispensable supplier of high-margin, hard-to-source materials.

In February, management outlined a $400 million brownfield investment, which includes a new Vacuum Induction Melt (VIM) furnace in Athens, Alabama, along with additional infrastructure and finishing assets in Reading, Pennsylvania.

While the technical details are complex, the key takeaway is that Carpenter is executing disciplined capacity expansion while adhering to its 3P Strategy – focused on productivity, pricing, and product mix – to address a persistent structural supply gap.

At the recent J.P. Morgan Industrial Conference, management discussed how Carpenter’s $2 billion backlog remains more than four times pre-COVID levels and reaffirmed its strong demand outlook in A&D and medical markets, while downplaying tariff concerns given the company’s resilience to past tariff adjustments.

Carpenter’s stock profile adds to its appeal.

It is a mid-cap industrial company that pays a modest 0.4% dividend yield, has a $400 million share repurchase authorization (with potential for expansion), and is expected to deliver 7% to 9% revenue growth over the next two years, with EPS growth likely to top 50% this year ($7.16 forecasted) and 24% in 2025.

While past tariff impacts have been modest, I’m going to hold off on adding CRS until we get through the next round of tariff negotiations.

The Stock
CRS has been around for a while, but the stock really changed character in late 2023 when it broke out to a 10-year high above 66. There was a little wobble early in 2024, but momentum soon returned and CRS blew through 100 in May then kept right on trucking until shares topped out at 214 in mid-January. There were decent drawdowns along the way, but CRS reliably bounced off its 50-day line each time, setting up a beautiful pattern of higher lows and higher highs. That trend broke down a couple of weeks ago as CRS fell through its 50-day line and almost touched its 200-day line. But over the last two weeks, buyers have stepped in and shares, now at 195, are trading less than 10% below their recent highs. WATCH

Cloudflare (NET)

Cloudflare (NET) snuck onto this month’s Watch List at the last minute, prompted by a double upgrade by Bank of America (from Underperform to Buy) and a dramatic pullback in the stock.

BofA’s upgrade focused on the company’s potential to become the leading provider of AI-as-a-Service (AlaaS) in the network security space.

This is largely due to two things. First is the company’s core value proposition – its connectivity cloud offers customers an alternative to building their own (and very expensive) capacity to protect websites, apps and APIs.

Second is an AI consumption-based delivery model that’s quickly gaining traction with enterprises that are upgrading their software-based security solutions to better fend off relentless cyberattacks.

Recent survey data suggests customers are increasingly turning to Cloudflare instead of offerings from bigger players like Amazon (AMZN), Oracle (ORCL), IBM (IBM) and Microsoft (MSFT), as well as other mid-sized players including CheckPoint (CKPT) and Cisco (CSCO).

A big part of the reason is the cost advantages of Cloudflare’s AIaaS.

Rather than force enterprises to pay for idle capacity during off-peak periods (as the hyperscalers do), Cloudflare’s technology dynamically routes AI workloads to underutilized infrastructure across its network.

The end result is that customers only pay for what they use, which Cloudflare says translates to as much as seven times more utilization per dollar.

While consensus estimates currently call for Cloudflare to grow revenue by around 26% this year and next, BofA’s bullish call suggests closer to 30% is more likely.

That would, theoretically, dramatically boost expected EPS growth, which is only expected to be around 6.5% (to $0.80) this year (though closer to 28% in 2026).

This is a compelling setup, especially given that NET closed about 28% off its February highs yesterday. Not ready to jump in just yet but tempted.

The Stock
NET came public in 2019 and was one of the big pandemic winners (we made over 210% on part of a purchase back then). It was also one of the big post-pandemic losers and has spent many quarters chopping around and giving the impression it was “back” when it really wasn’t. The rally in early 2025 was the latest example. NET began the year at about 110, headed north, then shot from 140 to 177 after Q4 results came out on February 6. The stock fell apart soon after, however, and two weeks ago, NET was back to where it was at the beginning of the year. The stock has perked up over the last week, but we’ll give it a little more time before we act. WATCH

Dutch Bros (BROS) ★ Top Pick ★

Dutch Bros (BROS) is a rapid-growth, drive-through coffee chain based in Oregon that focuses on fun, fast and excellent service.

The company was started in 1992 by two brothers, Dane and Travis Boersma, who got a pushcart and started slinging espressos. The business grew and the first franchise opened in 2000, then spread across the northwest.

In mid-2022 (roughly nine months after the BROS IPO), the company had 535 company-owned and franchised units across 12 states. Today it has 982 across 18 states.

Its biggest presence remains in the northwest and California, but newer locations are spreading across Arizona, Utah, Colorado, Texas and even as far east as Tennessee and Florida.

While the heart of the business is still serving espresso-based beverages to the under-30 crowd, Dutch Bros has grown its menu to offer a massive variety of customizable cold and hot beverages that include smoothies, lemonades, teas, sodas and more.

So while it’s technically a coffee chain, roughly half of sales are for energy and non-coffee drinks.

Combine that attractive combo with a company that’s far from a national player (but has that potential) and is enjoying the cumulative positive impact of a newer management team’s growth initiatives that span labor efficiencies (good for margins), brand-awareness marketing and rewards programs, and it’s not hard to see why enthusiasm for the stock was high heading into the Q4 report back in mid-February.

BROS knocked it out of the park, sending the stock to all-time highs in the mid-80s.

Shares have pulled back to pre-earnings levels lately, opening the door for new buyers to step in ahead of the upcoming (and first-ever) March 27 Investor Day in Phoenix, AZ.

Among the bullish talking points here are the potential for BROS to very realistically grow to 4,000 units (with up to 9,000 not out of the question), the recent addition of mobile orders and margin expansion potential.

As it stands now, analysts see 2025 and 2026 revenue growing around 23% and EPS up about 22% (to $0.60) this year and 36% in 2026.

The Stock
BROS came public at 23 in September 2021 and jumped 60% the first day. Shares traded as high as 81 six weeks later. The next two years were choppy, to the downside, then the following year was choppy, to the upside. BROS then suffered a big correction last August, but that was subsequently eliminated after the quarterly report in November, which sent shares nearly 30% higher and back above 50. BROS then walked higher until the Q4 report on February 12, after which it gapped up 30% to close at a new all-time high above 86. The recent market volatility pulled the stock back below 60 a couple of weeks ago but it has firmed up and, thanks to a high-profile upgrade from Morgan Stanley (MS), BROS is now back near 70. We’ll jump on board here. BUY

Freshworks (FRSH)

I added Freshworks (FRSH) to our Watch List last month (one week after it reported Q4 results) and just before the market really deteriorated.

Last week’s Fed meeting helped software stocks firm up considerably (more likely to cut rates this year), and given that we can now pay less for FRSH and still get the same great stock, we’ll add half a position today.

The big-picture story hasn’t changed in the last month.

Freshworks is still a high-growth software company offering cloud-based customer engagement (CRM) and business software to customers of all sizes.

It is well known for offering user-friendly, cost-effective alternatives to enterprise software from companies like Salesforce (CRM), Zendesk (private), and ServiceNow (NOW).

The company’s intuitive and affordable software has integrated artificial intelligence (AI) and automation features through its Freddy AI assistant that helps with customer support and sales processes.

The product lineup includes Freshdesk (customer support and helpdesk solution with AI-powered ticketing and automation), Freshservice (IT service management platform), Freshsales (CRM tool with AI-powered insights), Freshmarketer (marketing automation platform) and Freshchat (live chat and messaging with AI).

Fourth-quarter results beat expectations and highlighted 21.5% revenue growth ($195 million) and EPS of $0.14 (+75%).

While discussing the quarter, management said AI adoption is strong, deals are getting larger, and the recently acquired Device42 solution (an IT asset management solution) added significantly to the Q1 pipeline (Q4 was the first quarter the solution contributed revenue).

Management also said it expected a “stable to improving” small and mid-sized business market, offset by a little pressure with larger customers. Full disclosure: These dynamics will be a major focus on the Q1 call (expected in early May) given a recent uptick in macro concerns.

Revenue expectations for 2025 still fall within management’s guidance range (+12% to +14%), which implies stronger revenue growth in Q1 and Q2 that then slows down a little in the back half of the year. That may simply be due to caution on the part of management.

We’ll start with a half-sized position and see how it goes.

The Stock
FRSH came public in September of 2021 at 36 and traded near 50 before the pandemic-fueled bull market began to fade. The stock slipped into the low teens in 2022 before mounting a comeback, but that was cut short at the beginning of 2024. An ugly gap down after last May’s Q1 earnings report sent FRSH into the low teens. The tide changed in November when the Q3 report sent FRSH from 13 to 17 overnight. The stock rallied to 19.8 in the back half of January. FRSH has since retreated to a recent low of 14.3 (March 13) but, after a good week, is now trading near 16.5. BUY HALF

Sportradar Group AG (SRAD)

Sportradar (SRAD) is a Switzerland-based global sports technology company that integrates sports media and betting to deliver an immersive experience for fans and operators.

The company provides a suite of solutions tailored to consumer platforms, media organizations, sports betting operators, and sports federations.

Its offerings include fan engagement tools for media companies, sportsbook management solutions for betting operators, data-driven insights for teams and leagues, and integrity services to combat fraud, doping, and match-fixing.

Sportradar has a global presence, covering nearly one million sports events annually through partnerships with major professional sports organizations, including the NHL, MLB, NBA, NASCAR, UEFA, FIFA, Bundesliga, ICC, and ITF.

Recent developments have strengthened the company’s position in the industry.

In February, Sportradar announced an exclusive long-term partnership with MLB, set to commence this year and extend through the 2032 season.

Additionally, the company recently disclosed its intent to acquire IMG Arena and its global sports betting rights portfolio from Endeavor Group Holdings (EDR). This portfolio includes partnerships with over 70 rights holders, encompassing approximately 39,000 official data events and 30,000 streaming events across 14 global sports on six continents. Notable properties include Wimbledon, the U.S. Open, Roland Garros, MLS, EuroLeague Basketball, the PGA Tour, and UFC.

With revenue growth projected to outpace operating expense growth, the company appears positioned for sustained low-to-mid-teens revenue growth and significant EPS expansion.

Management will host an analyst day on April 1 (next Tuesday). Investors will gain insights into whether consensus projections for 2025 revenue growth of 14.3% ($1.38 billion) and EPS growth of 195% ($0.32) are reasonable or conservative.

The Stock
SRAD came public at 27 in September 2021 and immediately headed south. It didn’t firm up until it traded well below 10. The trend through mid-2024 was completely unremarkable. Shares began to drift higher in the back half of last year but didn’t really stand out until they shot to 18 in the two weeks after the Q3 earnings report on November 7. A brief consolidation phase was followed by a nice, steady rally in January and February that pulled SRAD to 23. The recent market volatility pushed the stock briefly below 20, then SRAD’s Q4 report last Wednesday sent the stock right back to its recent high near 23. The interest here is clearly high, but we’ll get through the Analyst Day before taking the next step. WATCH

PORTFOLIO CHANGES SINCE LAST ISSUE

We sold the last half stake of our position in FTAI Aviation (FTAI) for a 69% gain on March 7, when we also stepped aside from Reddit (RDDT) with a 15% loss.

Today, we will drop Core Scientific (CORZ) from our Watch List.

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

Stocks rated BUY are suitable for purchasing now. 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.

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 April 16, 2025.

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