Cabot Early Opportunities Issue: November 20, 2024

Stocks in This Issue

Year-to-Date Performance

It’s a little early to wrap up the books for 2024, but as we enter the last ten days of November, I thought it would be interesting to look back at what has been a pretty good year so far.

Year to date, we have sold 36 positions, 25 of them for a gain. That works out to a 70% win ratio.

Of those sold positions our 11 losers had an average loss of only -11%. Whew! Limiting significant losses has been a major focus this year, and with the one notable exception of Rivian (RIVN), we have succeeded. If we take RIVN out of the “loser mix,” which of course doesn’t make any sense at all, our average loss drops to only -7%.

Moving on to the more fun stuff ... we have sold 25 winners for an average gain of 19%.

Naturally, I wish that number was higher. But when I look back at some of the bigger gains, like 51% in SharkNinja (SN), 40% in Cava (CAVA), 72% in Vertiv (VRT), and 30% in Elastic (ESTC), consider our relative success limiting losses, that we’ve churned through 36 positions YTD, AND that we still have nine positions posting an average gain of 46%, I’m pretty satisfied.

And, I’m reminded (once again) of how important it is to remain vigilant in maintaining a balance between risk and potential reward.

What to Do Now

Continue to lean bullish but resist the urge to get overextended too quickly, especially in the more speculative stuff. Expect pullbacks as the market adjusts to all the variables and uncertainty of the incoming administration.

At the same time, recognize that the growing consensus is that stocks will be considerably higher a year from now with a Republican sweep, resilient/strong economy, and somewhat lower interest rates (might not be much lower than now though!).

It doesn’t make a lot of sense to be overly conservative when revenue and earnings expectations are going up.

At the risk of sounding like a broken record, it’s all about keeping things in balance.

NEW STOCKS

Amer Sports (AS)

Amer Sports (AS) is an outdoor gear company that makes and sells apparel, footwear, equipment and protective gear to athletes and consumers around the world.

Amer was started as a tobacco company in 1950 in Finland. Over the decades, it expanded into shipping, then printing and publishing. In 1974 the company got into ice hockey gear, then expanded further into the sporting goods industry in the 1980s, largely through acquisitions.

The transition to full-on sporting goods company was completed in 2004 when the last non-core company (tobacco) was divested and Amer Sports was officially born. It just came public in February.

Today’s collections of brands include Salomon (French roots, outdoor gear), Arc’teryx (Canada, outdoor apparel), Louisville Slugger (American baseball brand), Armada (U.S. skis), Peak Performance (Swedish outerwear), Atomic (skis, bindings, winter gear), Wilson (U.S., sports equipment, gear), EvoShield (protective gear), ATEC (baseball and softball training machines) and DeMarini (baseball bats).

The company just reported a third-quarter revenue and earnings beat yesterday morning before the bell.

Results were driven by strong sales across both the Outdoor Performance and Ball & Racket segments and better-than-expected profit margins. Revenue grew 17% to $1.35 billion (a 4% beat) while EPS of $0.14 beat by $0.04.

Management called out strong performance in China (+56%), partially due to the government stimulus program (which began in September), as well as consumer interest in health, wellness and outdoor categories.

Arc’teryx, a flagship brand and the highest margin franchise, was particularly strong with footwear, women’s products and a new hardshell jacket flying off the shelves. The brand is expanding its retail footprint across North America, China and Europe, opening nine new brand stores in Q3, bringing total store count to 134.

Salomon is another focus brand for Amer Sports right now, especially Salomon footwear. Management is leaning into this strength in China, opening 29 new Salomon shops in Q3, which brings total stores up to 165. There should be 200 Salomon stores in China by the end of 2024, and 404 globally.

With three-quarters of the year in the books, it’s reasonable to expect 16% to 17% revenue growth in 2024 and maybe slightly slower growth next year. EPS should expand more rapidly next year, maybe $0.70 versus around $0.44 this year (i.e., +57% EPS growth in 2025).

This is a compelling way to play consumer spending both in the U.S. and abroad. I think the rapid growth in China would be particularly attractive, if not for the potential for a trade/tariff war.

That’s the main reason I’m putting AS on the Watch List and not stepping in to buy right now, even though the chart is signaling AS goes higher in the near term.

The Stock
AS came public in February of this year at 13. While the stock traded as high as 18.2 a few weeks later it seemed to want to hug the 15 level through May. A summer slump pulled AS down to an all-time low of 10.1 in August, but an encouraging Q2 sent shares back above 13. The stock kept climbing through September, then rallied to 19.7 in early August as management commentary on the strong spending in China drove a wave of buying. A little drawdown to 17.3 found support at the 25-day moving average line just before the election, and AS has been strong since, even trading up to fresh highs near 21. WATCH

Astera Labs (ALAB)

I added rapid-growth semiconductor company Astera Labs (ALAB) to our Watch List last month ahead of earnings. With the stock performing well after the Q3 report and the bull case intact, we’ll go ahead and add a half-sized position today.

Recall that Astera was started in 2017 with the goal of developing networking technologies to connect the growing number of graphic processing units (GPUs).

GPUs were designed with thousands of calculators working in parallel. They were originally used for graphics and video rendering, areas where their ability to efficiently perform rapid calculations gave them the edge versus central processing units (CPUs).

In the last couple of years, as artificial intelligence (AI) models rapidly advanced, engineers realized that GPUs were the future of AI computing. They can slice through the mathematical lasagna of an AI model with superb speed and efficiency.

The catch is that GPU clusters need to talk to each other at very high data rates. This is where Astera Labs and its Intelligent Connectivity Platform come in.

Astera’s GPU networking solutions address the data, networking and memory bottlenecks that often limit GPU cluster performance.

Last month, I discussed how the company has emerged as the leader in its market, thanks largely to its PCIe retimer chip solutions, which are critical in AI compute clusters. And how these new solutions are expected to enjoy strong demand from the mega-cap tech companies.

That trend showed legs in Q3, with a growing set of large customers (GOOG, AMZN, AMD, NVDA, INTC) ordering Astera’s Gen 5 and Gen 6 PCIe retimer chipsets for their own growing programs.

Astera is also selling more content from other areas of the data center connectivity market to these large customers. One timely example is the company’s new switching product, which is utilized in Nvidia’s (NVDA) next-gen Blackwell GPU.

Stepping back from the tech details, the punchline is that Astera already holds over 80% market share in the PCIe retimer market. And new, high-margin solutions combined with new content (i.e., switches) mean big customers are spending more with Astera for their most important data center connectivity projects.

We’re now looking for 2023 revenue to grow by 230% to $383 million, (up $40 million from just a month ago), with consensus calling for 60% growth in 2025 (was 48% growth a month ago).

EPS projections have stepped up a lot too. Astera should deliver EPS of $0.72 this year (up from $0.57 last month) and EPS of $1.17 in 2025 (up from $0.84 a month ago).

The Stock
ALAB came public in March of this year at 36 and rallied to an intra-day high of 95 within a few sessions. That proved to be a bit too much and, other than a May rally to 88.6, ALAB spent the next three months trading in the 60 – 80 range. Shares sold off in June and July, eventually bottoming near 40 in the heart of the summer. Momentum picked up after 9/11 when a couple weeks of buying pushed shares to 55. A little wobble then on 10/9 ALAB gapped up from 53 to above 60 on news of the Gen6 retimer launch. ALAB was trading near 70 going into the Q3 report on November 4 then rallied 38% the next day to close just shy of 100. The stock has stayed strong in the 86 to 100 range since. We’ll step in here with a half-sized position. BUY HALF

GE Vernova (GEV)

GE Vernova (GEV) is another Watch List stock from last month that looks too good to stay away from any longer.

Following the spin-off from General Electric (GE) in April, GE Vernova became a pure-play electricity generation company. This is a market that investors are eager to have exposure to given durable megatrends like electrification, demand for reliable power and decarbonization.

Among the company’s three businesses, Power is the largest, generating 52% of revenue, Wind is second at 30% and Electrification is third with 18% revenue share.

Vernova is enjoying the strongest market for gas turbines in over a decade. These turbines are typically used to provide base load power. The latest market data (for the first nine months of 2024) shows things are not slowing down.

In the company’s recent Q3 report on October 23, management said orders for gas turbines have nearly doubled from last year. And Q4 should be the biggest quarter of the year for equipment orders.

Given strong demand the company is expanding annual manufacturing capacity for heavy duty turbines, from around 55 to 70 - 80 by 2026.

Electrification, while the smallest segment, continues to be the fastest growing (+24% in Q3). Management highlighted critical grid products (transformers, switchgears, etc.) as being in high demand given their role in connecting new electricity generation sources and improving grid reliability.

Turning to Wind, which continues to be the most challenged segment, the Offshore business took additional losses in Q3 and the timeline to burn down backlog was extended. The company has paused new orders for Offshore.

In Onshore, management sees potential for things to pick up by 2026 but isn’t putting an exact date on the calendar. While waiting for orders to pick up, the focus is on delivering modest profits from Wind.

Stepping back, Q3 showed a continuation of the trends from Q2. The company delivered a very slight revenue beat and guided for full-year revenue of $34 - $35 billion (roughly +5.4%), toward the high end of prior guidance.

The focus now is on the upcoming December 10 Investor Update. We should get a better picture of growth targets (2025 revenue currently seen up 6.2% while EPS seen up 170% to $6.97), as well as capital allocation plans (dividend, share buybacks) given GE’s growing cash pile.

The Stock
GEV closed at 135 on its first day trading as an independent stock on March 27. Shares rose through the spring then spent much of the summer trading between 150 and 185. GEV broke out above 200 on September 11, ran to 280 ahead of the Q3 report on October 23, then shot up to 300 after results came out. The stock made an all-time high of 350 on November 11 before a small pullback to 318. While the stock is clearly red-hot, we’ll take a swing with a half-sized position. BUY HALF

MakeMyTrip (MMYT) ★ Top Pick ★

For those interested in some international exposure it’s worth considering a position in MakeMyTrip (MMYT), an India-focused online travel agency similar to Kayak and Expedia (EXPE).

It is not a well-known company here in the U.S. But in its domestic market where the industry has been consolidating, the company is the clear leader.

As incomes rise and people in India continue to prioritize spending on travel, MMYT is one of the cleanest ways to play the trend.

MakeMyTrip is diversified across air tickets (26% of revenue), hotels (56%) and bus tickets (12%). A mix of other businesses generates the remaining 7% of revenue.

This revenue mix has changed dramatically over the years, with air travel becoming a much smaller share of revenue, and hotels rising dramatically. This points toward the growing use of the platform among business travelers.

That all said, air ticketing (+36%) was one of the fastest-growing of the major segments in the last fiscal year (2024), which ended in March. Hotels grew by 29%, while bus ticketing was up 24%.

Over the first half of fiscal 2025, total revenue has grown by about 22.5%. That growth rate should stick through the rest of the year, implying total revenue of at least $1 billion.

At that level of business, adjusted EPS should grow around 18%, to roughly $1.38.

On the most recent earnings call, management talked about international as one extremely strong area of growth. International is now 38% of total Air, 17% of Hotel and 12% of Bus, up from 33%, 12.5%, and 10%, respectively, last year.

Without a ton of competition out there, the company has room to grow margins as it expands, without spending a truckload of money on marketing. MakeMyTrip also has an existing share buyback program with around $150 million remaining.

The Stock
MMYT came public in 2010 and has had its fair share of ups and downs over the years. Naturally, the pandemic was a challenge. MMYT broke out to all-time highs above 42 last November, and the stock has been steadily chugging higher to its current level near 100 on a weekly chart ever since. Looking at a daily chart, there have been a few more ups and downs, but the worst of the drawdowns (April, May, and September) have been limited to about 20%, and shares have popped right back. With MMYT trading roughly in the middle of its most recent trading range (86 to 114) let’s not overthink it. BUY

Sprouts Farmers Market (SFM)

Sprouts Farmers Market (SFM) is not the most glamorous stock story out there. At the end of the day, it’s a grocery store chain that’s growing through expansion across the U.S.

But dig deeper and it’s clear why Sprouts is gaining in popularity.

Generally speaking, people are trying to eat healthier and organic. Plant-based, gluten-free, paleo, keto and dairy-free foods are becoming increasingly popular.

Sprouts plays right into these trends. Over 70% of products sold are attributed to these types of better-for-you and specialty products.

The company’s stores feature an open layout and focus on fresh produce. There’s a good-sized deli, bakery and meat and seafood area, bulk goods, and, where state law allows, beer and wine.

The chain offers a very inviting store that resembles the farmer’s market experience. And consumers, many of whom are Gen Z, Millennials, educated, in families, and have above-average incomes, continue to come back.

Sprouts also has its own brand, which is growing in popularity (20% penetration in 2023). E-commerce sales are on the rise, with 14.2% of sales so far in 2024.

These trends are part of why management has had the confidence to expand at a relatively aggressive clip. Sprouts expects to open 33 new stores this year, representing about 10% unit growth.

While there are opening costs associated with this expansion, gross margin continues to rise, hitting 38.1% in Q3 2024.

With operating cash flow of $520 million through the first three quarters of 2024, Sprouts is also able to fund expansion internally, with cash left over. The company has spent $132 million on CapEx so far this year, while buying back $130 million of its own stock.

The company posted 13.6% revenue growth in Q3. That puts Sprouts on pace to grow by 12.1% to $7.66 billion this year. Adjusted EPS, which grew 40% to $0.91 in Q3, is on pace to rise 30% this year and hit $3.69.

The only downside appears to be that the stock is very richly valued. That’s why a lot of analysts at the big banks have stayed on the sidelines. We’ll look for a better entry point as well.

The Stock
SFM came public in 2013 at 18, and after an initial rally to 49.5, the stock was pretty weak for years, ultimately trading well below its IPO price when the pandemic broke out. While SFM was back in the 20s and 30s in 2022 and 2023 there was no real upward trend. That began to change last September when SFM moved through 40. On the weekly chart, the stock kept rising from there to its current level near 143, with significant upside moves coming on each of the last four earnings announcements. Honestly, the daily chart doesn’t look much different, though there are more flattish and modest drawdowns investors have had to contend with. I suspect those have been challenging for investors who wonder when the good times will end. But so far, they haven’t. Looking for the next “boring” period to consider stepping in. WATCH

PORTFOLIO CHANGES SINCE LAST ISSUE

On October 24 we sold Veralto (VLTO) for a 1% gain, then sold Varonis (VRNS) on October 30 for a 2% loss. We exited HubSpot (HUBS) with a quick 7% gain on November 5, locked in a 51% gain on SharkNinja (SN) on November 6, and took losses of 4% and 54%, respectively, on UL Solutions (ULS) and Rivian (RIVN) on November 6 and November 8.

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 December 18, 2024.

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