Cabot Early Opportunities Issue: May 15, 2024

Stocks in This Issue

Portfolio Updates

With the exception of CAVA Group (CAVA), which reports on May 28, our Q1 earnings season has come to a close. Let’s quickly look back at how each of our positions fared through the season, and touch on what we’ll be listening for in the weeks and months ahead.

Alamos Gold (AGI) surpassed Q1 expectations, producing 135,700 ounces and selling 132,849 ounces, which brought in $277.6 million (+10.4%) in revenue and EPS of $0.13. Management reaffirmed full-year guidance, the price of gold has remained strong and AGI shares have been stable. The stock is up modestly from our entry point and is thinking about making a run to new highs above 16. BUY

CAVA Group (CAVA) has been making new all-time highs lately as the stock looks to move up through the 80 level. Earnings the week after next will likely define the next major move. The hurdle is revenue of $244.1 million (+20.2%) and EPS of $0.03. As always, buying right ahead of earnings is a bit of a gamble but I plan to keep CAVA at “buy half” into the event, so adding a few more shares is acceptable. BUY HALF

FTAI Aviation (FTAI) is up about 25% from our entry point in March after delivering another solid quarter on April 25. Aftermarket engine maintenance remains hugely important in the aerospace market and FTAI sits in a sweet spot given its focus on the best-selling single-aisle commercial planes out there. BUY

GoDaddy (GDDY) delivered another solid quarter and remains a behind-the-scenes AI play given its role helping companies and creators build and maintain websites. The new AI-powered Airo solution is off to a good start and represents the next potential growth engine for the company. BUY HALF

Microsoft (MSFT) hasn’t made a new high since late March but remains a rock in our portfolio. With a gain of 55% since I added it last February the stock has roughly doubled the return of the broad market. One of the major takeaways from the most recent earnings report is that Azure growth could accelerate over the next four quarters. That would mark a major change from the modest contraction some analysts expected. It’s one of the easiest ways to get exposure to the AI megatrend. BUY

Netflix (NFLX) had a very poor reaction to the company’s Q1 earnings report in mid-April, but over the last month the stock has bounced right back to where it was pre-reporting. That might be partly because the selloff was simply overdone (as has been the case with many this reporting season), but also because Netflix remains the clearest winner in streaming right now. Also, the surprise announcement that management will stop disclosing subscriber numbers doesn’t seem so bad after digesting that (a) the change won’t take place until next year, and (b) as different subscriber tiers and advertising plans add nuance to the business model a straight number of subscribers type of analysis becomes less meaningful. Of course, this change won’t matter so long as the company does well (which I fully expect). HOLD HALF

Rivian (RIVN) is far from a gem in our portfolio but it’s looking a lot better lately. I credit expectations that funding costs will come down and that the company is taking big steps to reduce costs. Surprisingly, RIVN traded higher yesterday even upon news that new tariffs may hit clean tech imports from China, which would theoretically make EV batteries more expensive. I continue to see RIVN as a long-term opportunity. BUY

SharkNinja (SN) stepped out to new all-time highs last week after reporting a nice beat and raise Q1. Simply put, everybody loves a neat, new, affordable appliance. And SharkNinja’s arguably the best in the business. BUY HALF

Soleno Therapeutics (SLNO) has been busy lately given FDA Breakthrough Therapy Designation for DCCR, a secondary offering (about $150 million) and an earnings announcement (no material new news). From here we’re looking out to an anticipated FDA filing for DCCR in the June-July timeframe, and hopefully eventual approval not too long after. HOLD HALF

Vertiv Holdings (VRT) has been hitting new highs lately as the stock looks to move up through the 100 level and push our paper gain to 100%, or more. Q1 earnings season featured commentary out of several mega-cap tech companies (META, MSFT among them) relating to plans to continue investing in digital infrastructure to support AI initiatives. That bodes well for Vertiv. HOLD HALF

What to Do Now

Continue to lean cautiously bullish and add exposure to stronger stocks and those with normal-looking pullbacks, while maintaining discipline and trying not to chase super-extended names.

With the market rebounding nicely from the April pullback on renewed rate-cut optimism (September cut now at 60% probability) and Fed official commentary, it’s OK to be a buyer here.

But we need to stay on top of the incoming inflation data (PPI yesterday was a little warm) since the battle to tame runaway prices has not yet been won. And the market is still extremely reactive to any upward/downward inflation data surprises, as well as Fed official commentary.

NEW STOCKS

Apple (AAPL) ★ Top Pick ★

Just like with Microsoft (MSFT), which I added last February (and which has doubled the return of the broad market with very little drama since), I see an emerging opportunity with Apple (AAPL) given strategic moves management has made that should get growth going again.

We’ll skip the intro on the company because, well, it’s Apple. There are four things I’m looking at that are starting to garner favor with big money, which will have to buy the stock hand over fist if it starts to run.

First, it looks like Apple is prepping devices for an AI-led upgrade cycle sooner than previously thought (i.e., 2025, not 2026).

It will begin with iPads, a product that (if 2024 estimates hold true) will not have grown in two years. While the iPad Air will be upgraded with the next generation of Apple’s processors (the W2), the iPad Pro will skip a generation (hasn’t happened since 2018) and go with the company’s newest silicon (M4), which is geared for AI workloads.

A well-executed iPad upgrade cycle could return the product to growth, and also set the stage for the new iPhone 16 release later in the year.

Second, shares could walk higher into the June WWDC, when Apple is expected to talk AI functionality specifics. Running generative AI models right on devices is expected, as are enhancements to features like Live Captions (transcripts), Visual Look Up (object identification), Subject Lift (move object out of a picture to use in other apps) and more.

The WWDC should help to build further excitement for the expected iPhone event in September.

Third, Apple continues to make considerable progress growing its very profitable Services business, which is on track to generate around $96 billion in revenue this year. That’s a hair more than Macs, iPads and wearables combined. Moreover, Services gross margin is seen growing to 74% this year, up from 71% in 2023. That’s far more profitable than devices’ gross margin, which has been around 37%.

Lastly, Apple recently authorized a huge share buyback program of $110 billion, about $20 billion more than the previous one. That alone should give investors some security. It also signals management’s confidence that the stock is a good value right now.

This isn’t all to say that Apple is a slam dunk. It’s still facing stiff competition in China and India (though recent results have been better than feared) and shares don’t trade at a cheap valuation. But when we add it all up it’s hard not to like Apple here.

Current consensus estimates suggest Apple will return to growth this year with revenue rising 1% to $387 billion (was down 2.8% in 2023) and EPS jumping 7.5% to $6.59.

The Stock
AAPL is trading at roughly the same level shares were at in January 2022. Between then and now the stock has traded as low as the 124 – 130 range (June 2022 and January 2023) and as high as the 190 – 200 range (July 2023 and December 2023). Since hitting an all-time high of 200 on December 12, 2023, AAPL has mostly trended lower but seemingly found support at 164 four weeks ago. Since then shares have moved into the mid-180s, with a convincing gap up on May 3 (+10%) following the Q1 earnings announcement and sending AAPL above its 25-, 50- and 200-day moving average lines. BUY

BellRing Brands (BRBR)

I’ve had BellRing Brands (BRBR) on the Watch List for a while and with the company delivering a solid Q2 (fiscal 2024) and full-year outlook right ahead of the summer “beach body” season, we’ll dive in today.

If you’re new to the story, BellRing is a mid-cap protein-focused packaged food company.

It sells two groups of products: ready-to-drink (RTD) protein shakes under the Premier Protein brand (83% of 203 revenue) and protein powders under the Dymatize brand (14% of revenue).

Last August management approved a plan to discontinue distribution of the PowerBar bar brand (3% of 2023 revenue), which has floundered for years.

The company’s products fit into the convenient nutrition category, so the stock is really a play on people trying to lead active, healthier lives and eating foods and shakes that help them replace typical meals and/or recover from exercise. It’s also a beneficiary of the new class of GLP-1 weight-loss drugs.

BellRing is concentrated within mega-retailers. Three-quarters of revenue comes from Costco (COST), Walmart (WMT) and Amazon (AMZN) while the remaining 25% comes from online, specialty, and convenience stores.

Growth has been fantastic for this type of company. Revenue in 2023 grew by 21% while EPS grew almost 14%.

In Q2 fiscal 2024 (reported last Monday), management delivered a beat and raise quarter as revenue grew by more than 28% (to $495 million) and EPS grew 88% (to $0.45).

Full-year guidance was increased, mostly because sales of Premier shakes and powders are going so well (some stores even sold out in April). The company is boosting production to better fill demand and marketing investments, combined with an anticipated price increase toward the end of the year, should keep revenue, EPS and margins all trending in the right direction.

For 2024, we’ll look for revenue to grow by at least 18% to $1.97 billion. EPS should be up 34% to $1.77, or better.

As a final sweetener, there’s been some chatter about BellRing being a potential acquisition target. I can get on board with that, especially given that the PowerBar divestment makes it a cleaner operation.

The Stock
BRBR came public at 14 in October 2020 and, given the current price near 60, it’s been a huge success. There was a roughly 15-month soft spot in 2021 and 2022 but in March 2023 BRBR broke out above the September 2021 high of 34 and, for the most part, it’s been making higher lows and higher highs since. The most recent exception was a four-week drawdown that began in late March and pulled BRBR down from it’s all-time high near 63 to about the 53 level. But the stock turned north quickly and over the last month, BRBR has walked steadily back up to 60. BUY

Core & Main (CNM)

Core & Main (CNM) is a mid-cap infrastructure “picks and shovels” type stock with a nice, clean growth profile and easy-to-digest story.

The company distributes products for water, wastewater, storm drainage and fire protection, and offers a few services to boot.

The bulk of revenue (67%) comes from pipes, valves and fittings, while storm drainage products make up 15%. The remaining 18% is split between fire protection and meters.

As you’d expect, customers are municipalities, private water companies and contractors. Around 42% of revenue comes from municipal projects while 38% is non-residential. The remaining 20% is residential.

The business is evenly split between new construction and repair/replace projects.

Like a lot of these types of businesses, it’s not crazy exciting. But as you drive around and begin to notice how many projects require the products Core & Main sells you’re like, OK, now I get it.

With a market cap of just $12 billion, Core & Main has a ways to go before it becomes the dominant nationwide distributor. But it’s getting there.

After a couple of big growth years in fiscal 2022 (+37%) and fiscal 2023 (+32%), Core & Main grew just under 1% in fiscal 2024 (its fiscal year ends in January).

Moving forward, management sees the company growing at roughly double the market’s 2% to 4% pace (i.e., 4% to 8% growth), while adding another 3% or so through a roll-up acquisition strategy.

This year (fiscal 2025), consensus estimates are calling for revenue +11.3% ($7.46 billion). EPS should be up nearly 14%, to $2.45.

The Stock
CNM came public in May 2021 at 20 and had a few good months before succumbing to the selling of the 2022 bear market. The stock’s action changed for the better after the March 28, 2023, earnings report when CNM closed near 22. By the end of August, shares were at 33. From there CNM didn’t do much for a while but got moving again after the December 5 earnings report (when it was trading near 35). Following that event, CNM marched steadily higher, ultimately hitting an all-time high of 60.8 on April 4. A little pullback to 53.3 soon followed, but over the last three weeks, CNM has inched back near the 60 level. Earnings are out in three weeks, so we’ll put CNM on our Watch List for now. WATCH

Flowserve (FLS)

As the quarters roll by it’s becoming clear that the combination of decarbonization initiatives and infrastructure upgrade spending (Inflation Reduction Act, etc.) is helping players in the industrial products/engineering space.

On my list of preferred companies in that arena is Flowserve (FLS), a Texas-based company that makes all manner of pumps, valves, seals, automation and engineering products and services.

It’s the most levered stock to the highly specialized flow control market, which means it has a lot of exposure to the oil and gas (about 60% of revenue), chemical, power (electric, nuclear, renewal) and water control industries.

Each of these end-markets has its own drivers, and most of them are doing extremely well.

For example, the U.S. is moving toward electrification while at the same time data center and AI infrastructure spending is ramping up. This is good for Flowserve’s power business.

In the Middle East, demand for chemical capacity is on the rise, also good for Flowserve.

And in Europe, decarbonization projects mean Flowserve is installing monitoring solutions for wind projects and pumps and valves for carbon capture (CCS) projects.

This is a small sample of applications where Flowserve’s premium-priced products are being used. And it’s not alone. Other companies in the same general space include Emerson (EMR) and ITT (ITT).

But with the smallest market cap (roughly $6.5 billion) and plenty of positive trends (backlog on the rise, margins going up), Flowserve is my top pick to play the trend.

In Q1 (reported April 29), revenue rose 11% to $1.09 billion (a nearly 5% beat) while EPS jumped 45% to $0.58 (an 11% beat). That should put the company on pace to grow revenue by at least 6% (to $4.58 billion) this year and help EPS jump 26% (to $2.65).

The Stock
FLS has been around for a while so the stock has been up and down through the cycles. What’s jumped out at me is how the stock has been grinding higher since the October 25, 2023, earning report, when FLS was trading near 35.4. Over the last six-plus months FLS has mostly stayed above its 25-day moving average line, and solidly above its 50-day line. Since last week when earnings were reported, FLS has stepped out to new multi-year highs. With the stock looking a touch extended right now, I’ll toss it on the Watch List and look for a buyable dip. WATCH

Kaspi.kz (KSPI)

I added Kaspi.kz (KSPI) to our Watch List last month, and with shares acting well following a solid earnings report, we’ll take a swing with a half-sized position today.

If you’re new to the story, Kaspi.kz is a newly public company (IPO January 19) that has developed a two-sided Super App that matches merchants and consumers in its home country of Kazakhstan, an off-the-beaten-path, landlocked country in Central Asia.

Kazakhstan shares borders with Russia to the north, China to the east, and parts of Turkmenistan, Uzbekistan and Kyrgyzstan to the south.

The company’s Super App is a suite of integrated mobile apps spanning payments (24% of revenue), a marketplace (23% of revenue) and fintech (53% of revenue).

These symbiotic offerings interact to drive higher use across the platform. For example, growing marketplace use drives higher payments, more sellers joining the platform drive wider marketplace offerings and more fintech opportunities, etc.

It’s becoming hugely popular across the rural country, which has one of the lowest population densities in the world.

But even though the Super App has around 13.5 million monthly average users (MAUs) and around 90% of Kazakhstan’s adult population has used it in some way, there’s still a ton of opportunity. E-Commerce in Kazakhstan hovers around just 10%, well below what it is in the U.S. (25%) and China (32%).

The company has been growing extremely quickly. Revenue was up 45% to $4.26 billion in 2023, when EPS grew by 44% to $9.76.

In the first quarter of 2024 (reported April 22), Kaspi.kz beat expectations as revenue expanded by 44% to $1.24 billion and EPS came in at $2.58.

The Marketplace segment (offline and online purchases, grocery delivery, travel, advertising, logistics) was the fastest growing segment with revenue up 102% and Gross Merchandise Value (GMV) up 62%.

Standout areas within Marketplace were e-Commerce (GMV +114%) and e-Grocery (GMV +125%, active customers up 84%). The new e-Car platform (kick-started through the acquisition of Kolesa.kz) also added growth and will remain an area of focus.

In the Fintech segment (BNPL, business financing, auto financing, etc.), relatively high interest rates and stagnant deposit base growth led to modest underperformance relative to analyst expectations. But online car financing and micro financing are areas of strength and management believes Fintech will accelerate in the back half of 2024.

In Payments, revenue and net income were both up 25% (net income hit a record) as the company’s proprietary payments network coupled with growth in Kaspi Pay merchants and B2B payments keep segment growth alive and well.

The bottom line here is that Kaspi.kz offers access to a compelling growth opportunity in the emerging market of Kazakhstan, which is a safe country (classified as Level 1 by the U.S.). We’ll be looking for 20% to 25% revenue and EPS growth this year, with the possibility of some dividend income as well (current yield is around 6%).

The Stock
KSPI’s U.S. American Depositary 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 KSPI rallied straight up to 136. That’s the all-time high in the stock’s short trading history. Soon after, KSPI sold off, ultimately finding support at 108 in the second week of April. Shares were stable heading into the April 22 earnings report and since then have continued to advance higher. The current price near 120 seems to offer a decent entry point. Let’s step in with a half-sized position. BUY HALF

PORTFOLIO CHANGES SINCE LAST ISSUE

Leonardo DRS (DRS) was sold for a modest profit of 9% on May 10 and Intuitive Surgical (ISRG) was sold yesterday (May 14) for a -1% loss. Those sales bring our year-to-date win ratio to 75% (12 of 16 positions sold for a profit). No stocks have been sold for a loss of more than -9%, and our average loss on the four losing positions sold is only -5.5%.

On April 19 Netflix (NFLX) 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 June 20, 2024.

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