Cabot Early Opportunities Issue: October 16, 2024

Stocks in This Issue

Portfolio Updates

Apple (AAPL) has shrugged off a widely publicized partial position sale by Warren Buffet, rumors that the iPhone upgrade cycle is off to a slow start (it’s only been a few weeks) and plenty of other dour headlines. The stock could care less. It hit an intra-day all-time high yesterday. And analysts continue to see revenue growth rebounding from a down year in 2023 to grow 1.9% this year, including +4.9% in Q3 and +5.4% in Q4 (i.e., back half better than front half). Then revenue accelerates to 7.4% next year. Meanwhile, EPS is seen up 9.4% this year and up over 10% in 2025. Earnings are out on 10/31. The upgrade cycle and Apple Intelligence will be topics of discussion. BUY

AST SpaceMobile (ASTS) pulled off a successful launch of the BlueBird satellites just over a month ago. We’re continuing to hang out in the stock (which is up over 100% since we bought in June) and wait for news that limited service has begun and more specific plans regarding more satellites being launched. HOLD HALF

FTAI Aviation (FTAI) 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

Klaviyo (KVYO) should report on November 5. The stock has been gaining momentum and is within a stone’s throw of all-time highs, which were struck right after KVYO came public last September. A number of analysts have picked up coverage or increased price targets lately, including Barclays (PT raised from 32 to 41), Baird (PT increased from 35 to 42) and Benchmark (new coverage, Buy rating and PT of 42). Recall that Klaviyo is a software company with a marketing platform for online retailers, mainly Shopify (SHOP). BUY

Loar (LOAR) is one of last month’s new additions and the stock is trading right around our entry point. Earnings aren’t expected until later in November, and there hasn’t been any big news to speak of. The aerospace stock is another play on supply chain constraints in the OEM market as Loar makes a wide range of parts for both the aftermarket as well as original equipment commercial market. Management raised guidance after the Q2 report back in August. BUY HALF

Microsoft (MSFT) has pulled back from its highs and opened the door for new money to enter. It’s a great stock that’s a buy at current levels, especially if Azure growth reaccelerates in the back half of the current calendar year, which is the first half of MSFT’s fiscal 2025. I’m also looking for gradual growth in Copilot. Analysts see revenue growth of 14% in the upcoming quarterly report, which should be on October 30. BUY

Rivian (RIVN) is still a dog after yet another production guidance cut (it’s not alone). But I’m sticking with it, for now, as upside potential seems far greater than downside risk. BUY

SharkNinja (SN) should be out with an earnings report on November 7. As expected, the company recently announced new beauty products, the Shark FlexFusion and Shark FlexFusion Straight. These releases come on the heels of the Ninja Luxe Café and Shark PowerDetect Technology for cordless and robot vacuums. This company has a knack for creating products that consumers want. Until that changes, I’m inclined to stick with it. We are up 83%. HOLD HALF

Soleno Therapeutics (SLNO) stock has been pushing up against new highs as we march toward the deadline of December 27 for a “go or no go” decision from the FDA regarding the company’s NDA for DCCR, its drug candidate to treat Prader-Willi Syndrome. If approved, I expect a nice upside move. Last week we heard that the FDA said no advisory committee meeting is required at this time, though that could change. In theory, this should help to speed up a decision, but there are no guarantees when it comes to the FDA. HOLD HALF

UL Solutions (ULS) pulled back in September, opening the door for new buyers to step in. And they have. Shares are sailing back toward their previous highs on steady buying pressure. On Monday the company said it has a new standardized rating program for devices with AI built in, which it hopes will help businesses and consumers make “informed decisions about adopting and using these products.” Earnings aren’t expected until later in November. BUY

Varonis (VRNS) was one of last month’s new additions and shares have just begun to take off, with a breakout to multi-year highs above 58.3 happening late last week. The company’s data protection platform is seeing rising demand due to never-ending ransomware attacks and data breaches, as well as from clients seeking clearer data governance standards that stop LLMs from leaking sensitive information. Earnings should be out on October 29. We’re looking for Q3 revenue to grow by 15.8% to $141.6 million and EPS of $0.07 or better. BUY

Veralto (VLTO) just jumped out to new all-time highs above 113. The company just announced it will acquire the company that owns TraceGains software, which will help its Esko-branded digital workflow product for packaging and label design. The acquisition amount was $350 million. Citi just increased its price target from 110 to 118. Earnings are due out next Wednesday, October 23. We’re looking for revenue to grow by at least 3.9% to $1.3 billion and for EPS of $0.85 or more (+13.6%). BUY

What to Do Now

Lean bullish, but don’t go overboard as volatility could easily pick up in the coming weeks. Keep portfolio size manageable and don’t be afraid to book some profits, as we did yesterday with Modine (MOD).

We have earnings season ramping up, the U.S. presidential election is on November 5 and the next FOMC meeting is on November 7. It’s entirely possible the Fed will hold rates steady, regardless of what the dot plot says. Israel’s war with Hezbollah could go even more sideways.

While investors are keenly watching these “known” risks and it’s perfectly plausible that none will materialize into real issues for the market, there are no guarantees.

On the other hand, the market has continued to make new highs, earnings are expected to accelerate into 2025, the widely feared recession hasn’t materialized and looks unlikely to in the near term, and there are a ton of stock charts that look fantastic!

So, as it so often is, it’s all about keeping things in balance.

NEW STOCKS

Astera Labs (ALAB)

Astera Labs (ALAB) is a semiconductor company that was founded in 2017. The idea was to create a networking specialist with technologies that could connect the growing number of graphic processing units (GPUs) together to solve increasingly complex computing challenges.

GPUs, which were designed with thousands of tiny calculators working in parallel, were originally used largely for graphics and video rendering. They excelled at this task by performing technical calculations faster and with greater energy efficiency than 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. With hundreds of cores working on thousands of threads simultaneously, GPUs can slice through the mathematical lasagna of an AI model with superb speed and efficiency.

However, there is a catch. For large GPU clusters to solve massive, complex problems they need to talk to each other at very high data rates. Otherwise, it’s like connecting a supercomputer to the internet with a dial-up connection. It just doesn’t work.

This is where Astera Labs comes in.

The company’s Intelligent Connectivity Platform offers several GPU networking solutions that address the data, networking and memory bottlenecks that often cap GPU cluster utilization to roughly 50%.

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.

Management is expanding the company’s focus, both in PCIe retimer solutions as well as other areas of the data center connectivity market, including traditional networking and CXL memory connectivity.

Just last week Astera announced it will introduce a new product family, a purpose-built AI-centric PCI gen 6 switch, the first of its kind to hit the market. This should make the company more competitive (Broadcom (AVGO) has a significant presence here).

In the coming quarters, analysts will be closely watching Astera’s trends with its key customer base, including Nvidia (NVDA), Google (GOOG), Amazon (AMZN), Meta (META), Microsoft (MSFT), Intel (INTL) and AMD (AMD), among others.

This year will be a big one for Astera. We’re looking for revenue to grow by nearly 200% to $344 million, then consensus is calling for 48% growth in 2025, to $511 million.

The company should turn a profit this year too, delivering EPS around $0.57. EPS is seen expanding at 47% (to $0.84) in 2025, roughly the same pace as revenue.

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 September 11, when a couple weeks of buying pushed ALAB up to 55. A little wobble, then on October 9 shares gapped up from 53 to above 60 on news of the Gen6 retimer launch. ALAB has pushed into the mid-60s since. We’ll get to know ALAB by putting it on our Watch List. WATCH

BBB Foods (TBBB) ★ Top Pick ★

Discount retailers are enjoying strong demand across the globe. Many of these companies, like T.J. Maxx (TJX), Costco (COST) and Walmart (WMT) are well-known.

That’s not the case for the name we’re jumping into today.

Tiendas 3B (TBBB) is Mexico’s leading “hard discount” grocery store chain, which means a 10% to 20% pricing gap versus traditional grocery stores. Warehouse and club stores typically have a 10% to 15% pricing gap.

It operates in Mexico’s competitive food retail market where Walmex, Walmart’s (WMT) largest division outside of the U.S., has roughly 50% market share.

While big chains have a significant presence in Mexico, 3B has taken a different strategy than trying to sell everything to everyone.

Rather, the company’s growth is tied to smaller, more frequent purchasing patterns. In this way, 3B’s business model is more complimentary than directly competitive to those of mass market retailers.

The company’s name, 3B, stands for Bueno, Bonito y Barato in Spanish, which translates to good, nice and affordable. It is founder-led, and several executives have been with the company for over 15 years.

It currently operates 2,300 stores and carries a limited assortment of roughly 800 high-turnover products, half of which are private label. It is highly focused on operational efficiency.

The growth plan is highly dependent on expanding store count, which could easily track to 4,500 in 2028 (+95% over the current level) then grow from there. At the current scale 3B likely has around 2% market share.

This seems plausible given the historical expansion trend. As the company scales up, it should enjoy margin efficiencies, though it’s not a straight-line equation. Lately, management has been able to negotiate better terms with suppliers. However, it bears repeating that 3B’s hard value model means passing savings on to consumers to drive repeat visits.

Currently, consensus forecasts suggest 3B will grow revenue by 16.5% this year, to $2.99 billion) then by 27.4% in 2025. Current year’s estimated EPS is $0.20, which is seen growing by 94% to $0.39 in 2025.

The Stock
TBBB just came public on February 9 at 17.5. Since then, the stock has shown a tendency to rally and pull back, and the trend is clearly up and to the right. Most of the drawdowns have been of a reasonable scale given the company’s profile (small cap, new IPO, etc.). The last rally began in June, when TBBB was trading near 21, and it lasted until the end of August when shares topped out at 33.2. For the last 33 days, the stock has been consolidating/trading up and down in the 28 to 33.2 range. TBBB attempted to break out yesterday as shares pushed as high as 34.2. We’ll step in here hoping that this is the beginning of the next move higher. BUY

EVgo (EVGO)

One of the big barriers to widespread electric vehicle (EV) adoption is a lack of fast-charging stations. While home charging works for some, adoption just won’t take off until people can go where they want, when they want, without a real risk of getting stranded with a dead battery.

EVgo (EVGO) is one of the companies working to create a nationwide direct current (DC) fast-charging network. These stations can add around 100 miles in five to fifteen minutes of charging.

The company works with national and regional grocery stores, auto OEMs, hotels, gas stations, parking lot operators, shopping centers and other high-traffic merchants and government entities to install and/or build charging stalls.

There are plenty of growth challenges facing EVgo, as well the broader EV market.

One of these is the current slow pace of EV adoption. But this is one of those situations where the “if you build it, they will come” mentality actually makes sense.

Unfortunately, if new infrastructure isn’t built that just means existing EV owners and fleet operators face limited charger availability at existing locations. That could push up charging costs.

Longer term, EV penetration should pick up. Electrification is the big-picture trend, and it’s hard to imagine a world 20 years from now where EVs aren’t everywhere.

Even in the current environment EVgo has been expanding and enjoying growth in charger utilization and rates. The company has been expected to improve gross margins to get to positive adjusted EBITDA earnings by the end of 2025. This assumes expanding at a rate of 800 to 900 charging stalls per year off its current base of 3,440.

That pace of growth looks attainable, if not conservative, following major news that the Department of Energy (DOE) has just given EVgo conditional commitment for a loan guarantee for up to $1.05 billion.

The loan will fund around 7,500 DC fast chargers, 40% of which need to be in marginalized communities. EVgo will also benefit from the IRA 30C tax credit (30% of commercial project costs up to $100K) and other state and local incentives to reduce costs.

Assuming the loan goes through, EVgo could have around 12,500 charging stalls by 2030, generating around $40K in annual cash flow per stall (within three to five years), for a total of $500 million in annual cash flow. Granted, that’s based on a number of assumptions, but it frames the opportunity.

As it stands now, analysts are expecting revenue to grow by about 60% this year (to $257 million) then 37% in 2025. EPS loss should be about -$0.43 this year and -$0.32 next year.

With the stock still reacting to news of the loan and the broad market maybe getting a bit frothy with the more speculative names, I’ll put EVGO on the Watch List today.

The Stock
EVGO came public at 10 via SPAC IPO during a red-hot market, in September 2020. Shares gained initially, but as the rally faded into 2021 and then the bear market took over, EVGO traded in a relatively erratic fashion, but the emerging trend was clearly down. And the retreat lasted until April of this year when shares finally bottomed out near 1.7. Since the beginning of July, EVGO’s trend has been downright bullish. The stock ran up to 4.0 in the first half of the month then bounced around between 3.3 and 4.8 through September. The big upside move (+61%) came on October 3 when the DOE loan was announced, and EVGO has crept up in the mid-7s since. We’ll be watching. WATCH

HubSpot (HUBS)

HubSpot (HUBS) is a software company that’s a leader in the inbound marketing space. Its platform is used by small and mid-sized companies to attract potential customers through all the digital channels, including social media and web properties.

It’s a stock we’ve owned twice before, in both 2021 and 2023. Both times we made money.

This time around I’m adding HUBS because it’s a relatively simple story that I/we are already familiar with, it plays into the ongoing trend of businesses consolidating IT spend with best-of-breed operators, and because I’m seeing more software stocks act well.

I also see a compelling swing trade opportunity here.

Back to the company, HubSpot’s platform is a key tool in a growing marketing automation industry.

It includes all sorts of inbound marketing tools (called Hubs) to help clients manage website content, blogging, email campaigns, SEO, social media monitoring, CRM and more.

With HubSpot, businesses can have marketing teams use a single console to generate new leads, convert those leads to customers and drive customer retention initiatives. It’s a relatively easy platform to use, and in fact, we use it right here at Cabot.

It’s not the go-go growth story that it used to be when it was a small cap. But growth is still very reasonable, though trending lower as the revenue base grows.

Revenue should be up about 18.5% this year to $2.57 billion then grow another 16% in 2025. EPS should grow 31% this year to $7.72 then expand by 16% in 2025.

At an analyst day in September, management talked up resiliency in the business, which is likely growing faster than the competition. By Hub (which were all built in-house, no acquisitions here), in Q2, Marketing Hub grew 13%, Sales Hub grew 24%, Service Hub grew 28%, Content Hub grew 30% and Operations Hub grew 57%.

Management talked about more customers adopting the full suite of solutions, benefits from more partnerships and, importantly to analysts, margin expansion potential thanks to sales and marketing leverage.

I don’t expect HUBS to become a long-term holding for us. But it seems like a relatively low-risk swing trade with potential to jump above resistance soon and deliver an attractive return within a few months.

The Stock
HUBS has been public since 2014, peaked at 866 at the end of 2021 and bottomed in the mid-200s in the final months of 2023. The stock benefited from speculation of a buyout from Google (GOOG) earlier this year but took a hit in July when a limited data breach slammed shares (-12% on July 10, 2024) and prompted Google to call off the potential deal. The stock kicked around in the 430 to 510 range through mid-September, then started to gain altitude, with a little pullback to the 25- and 50-day lines two weeks ago pulling in buyers. HUBS has walked up to the 560 level since, which puts it just a few points below its 200-day line at 570. If shares can break above this technical line they’ll have erased all of the drop from the data breach in July. I think there’s a good chance. BUY

OneStream (OS)

I added OneStream (OS) to our Watch List last month and shares immediately ran 15% higher. With the stock having pulled back to where it was at the time of last month’s Issue, and more software stocks screening well, we’re going to take a swing at it today.

Nothing has changed with the story over the last month, though a few analysts have picked up coverage and raised price targets. These include BMO Capital Markets (initiated with Outperform, PT 38) and Morgan Stanley (PT increase from 29 to 35).

OneStream, which was founded in 2010 and went public in July, is an early mover in the market for finance software.

Management is hoping the company’s software will become the operating system for modern finance, freeing CFOs and finance departments from the tedious, error-prone and time-consuming workarounds that other departments have shed by adopting comprehensive cloud-based software platforms.

The chief concerns that have held widespread adoption of finance software back are security and data integrity. OneStream thinks those concerns are fading quickly as the cloud computing environment has matured.

OneStream’s software, which features embedded AI and ML for enterprises, helps CFOs with planning, forecasting, employee performance, decision-making, analytics and more.

Roughly 11% of revenue comes from on-premise software licenses sold mostly to government entities while 81% comes from cloud software sold under the typical subscription model. Professional services make up the balance.

When the company reported Q2 results on September 3, its first report as a public company, revenue of $117.5 million (+36%) and adjusted EPS of -$0.02 slightly beat expectations. Subscription revenue grew by 44% to $103.1 million.

Management also gave forward guidance ahead of what the market expected, calling for 2024 revenue to grow 27.5% to $478 million and for adjusted EPS to fall in the range of -$0.05 to $0.01.

Analysts are sticking with these numbers, for now.

The Stock
OS came public at 20 on July 24 and rallied 35% the first day. Shares then consolidated in the 26 to 29 range for a few weeks before breaking higher and running into the low 30s just ahead of the Q2 earnings report on September 3. A swift four-day drawdown to 28 followed, then OS jumped right back above 30. I added to our Watch List at that level a month ago, after which OS promptly ran to 35. It has since pulled back to 28 and bounced right back to 30. We’ll take a swing at it here. BUY

PORTFOLIO CHANGES SINCE LAST ISSUE

On October 7 we let Magnite (MGNI) go for a modest loss of 9%. Yesterday, October 15, we sold Modine (MOD) for a 17% gain.

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 November 20, 2024.

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