Cabot Stock of the Week Issue: April 1, 2024

The first quarter of 2024 picked right up where the fourth quarter of 2023 left off. The S&P 500 was up more than 10% to close at new all-time highs – its best first-quarter performance since 2019. The Nasdaq was up about 9%. Even the S&P Equal Weight Index advanced 7%, as stocks of all sectors – not just the “Magnificent Seven” and artificial intelligence plays – performed well.

Can they keep it up? I think so. I doubt stocks will advance another 10% in the second quarter, but I also don’t see the bull market dying of “old age” (it’s actually not that old!) or getting torpedoes by high inflation or a bad earnings quarter; the U.S. economy is simply in too good a shape for either to happen, as the Fed inches closer to the “soft-landing” scenario it’s been talking about for more than a year.

You never know, of course. There are still two major wars happening, a presidential election just seven months away, and interest rates remain at multi-decade highs, for now. But the trends are encouraging. So, we’ll keep leaning into those trends.

Today, we add another technology play, but again it’s in a name you surely know. As with Microsoft (MSFT), this household name has gotten a jolt of new life from artificial intelligence, which is why it’s been in Carl Delfeld’s Cabot Explorer portfolio for months. Now, we’ll step in, with the stock up 35% in the last six months.

Here it is, with Carl’s latest thoughts.

International Business Machines (IBM)

Within the growth technology sector, the subsector that has taken off in the last year-plus has been artificial intelligence (AI).

You may be wondering whether this is another investment stock mania or a long-term opportunity.

I think it’s both.

The internet, for example, has certainly transformed the world but a lot of investors got burned in the dot.com boom. On the other hand, investors who stayed with established technology companies – like Microsoft (MSFT), Amazon (AMZN), and Apple (AAPL) have done remarkably well.

Artificial intelligence – a field of computer science that focuses on building software for machines to perform intelligent tasks like and even better than humans – what I call inhuman intelligence – is a disruptive development potentially more powerful than the internet or electricity.

BCA Research believes that AI could boost economic growth by 30X to 100X, roughly comparable to the impact of the agricultural or industrial revolutions.

There is opportunity here, and one way to invest is to try to find the new companies in the AI space that will emerge as winners in this competitive arena.

Lots of risk and a chance for big gains.

A more conservative strategy is to invest in a blue-chip tech stock that supports AI. And that’s exactly what you get with IBM.

Known as “Big Blue,” IBM now primarily helps businesses and governments manage their information technology in the cloud era.

For IBM, the only constant is change. IBM began by making clocks and cheese slicers and then the punched-card tabulator. After that came one innovation after another: typewriters, vacuum tube calculators, magnetic tape, the first disk drive, the memory chip, FORTRAN, fractals, ATMs, mainframes, mini-computers, personal computers, and supercomputers.

In 2005, IBM’s personal computer business was sold to China’s Lenovo since it was evolving into a low-margin commodity business. Most recently, the company has moved from hardware to a higher-margin consulting and services business and is focused on helping clients migrate to the cloud.

IBM does not sit on its reputation. About 6% of its revenue is poured into intensive research and development. This firepower yields thousands of patents each year as the company masterfully leverages its global network of staff and nine research labs. IBM is now an active player in 170 countries and sales to emerging markets have boomed; it might surprise you to learn that about 30% of its workforce is based in India.

IBM has also been blessed with outstanding leadership at the top. Tom Watson is of course famous as the gruff but driven founder readily handing out cash on the spot for ideas he liked.

Getting back to artificial intelligence (AI), consider that the world now creates astronomical amounts of data each day. AI is the only way to effectively process and use all this information.

It enables computers, robots, and other connected devices to instantly share information and copy human perception, learning, and problem-solving. This allows machines to independently perform specific tasks with increasing accuracy.

It can be argued that IBM is already the world leader in AI.

It has been working on applications in this field for over four decades and has deeper AI knowledge than virtually any company. Its supercomputer Deep Blue beat world chess champion Gary Kasparov in a six-game match in 1997.

Recently, IBM launched an all-new version of Watson – called Watsonx – to help customers create AI applications of their own, to squeeze more value out of their data.

The complicating factor for us is that IBM won’t say how much of its revenue is tied to AI because it is so difficult to break out of each of its market segments.

Finally, compared to many other AI-related stocks that have made major moves already in the last year, IBM is a bargain.

The stock sells for about 19 times projected earnings for the next 12 months. And yet, shares are in a clear uptrend, advancing 48% in the last year. Still, the stock trades well below its peak above 200 per share from more than a decade ago.

IBM also has a decent and dependable dividend yield. The company has paid a dividend every quarter since 1916 and has had 28 consecutive years of dividend increases.

This is a great, time-tested stock that’s been reborn on the strength of the newest, hippest trend on Wall Street.

Current Recommendations

Changes Since Last Week:
Varonis (VRNS) Moves from Buy to Sell

Our spring cleaning continues, as mid-cap Software-as-a-Service play Varonis (VRNS) gets the hook today despite a 16% return in four months. The tide has clearly turned against the stock, however, as shares have dipped below their 50-day moving average. Best to get out now and book the decent return.

Most everything else is holding up well, though the growthier stocks in our portfolio have largely stagnated as the market rotates into retail, value, small caps and other sectors. The forthcoming Q2 earnings season should be a nice litmus test for what deserves to stay in our still-bloated portfolio … and what doesn’t.

Here’s what’s happening with all our stocks.

Updates

Alexandria Real Estate Equities, Inc. (ARE), originally recommended by Tom Hutchinson in the Safe Income Tier of his Cabot Dividend Investor advisory, remains in the same 123-129 range it’s been in since February. However, the life sciences property REIT is threatening to break above that range, and one good day could do the trick. That kind of breakout would be bullish in the short term; the Fed’s plan to start cutting interest rates later this year is bullish in the intermediate to long term. HOLD

American Eagle Outfitters, Inc. (AEO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, keeps hitting new highs! Shares of the clothing retailer inched up to 26 from 25 and are now up 23% through the first three months of 2024. There’s been no news. But customers have clearly returned after a couple down years: sales reached a record $5.26 billion in (recently completed) fiscal 2024 and are on pace to top that ($5.55 billion) in fiscal 2025. And yet, shares still trade at less than 15 times forward earnings estimates even after the recent run-up. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, was flat this week after a big run-up. The U.K.-based life insurance and investment management firm is coming off a strong quarter in which full-year 2023 operating profits improved 9%, net insurance revenues increased 8.5%, and the return on equity was 14.7%. Also, the company said it will continue to return cash shareholders with a 5% dividend raise later this year, and with a new £300 million share repurchase program just underway, which will reduce share count by 2%. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is flirting with new 52-week highs, trading at 131, just shy of its late-December peak above 133. It’s pretty simple with this Bull Market Stock: if the market performs well, BX performs even better. True to form, with the S&P 500 up 25% in the last five months, BX shares are up 43%. As long as the bull market remains intact, BX will remain in our portfolio. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was down 1% this week, though the trend is still decidedly up. Here’s what Tom had to say about it in his latest issue: “It’s back in business. After a rare pullback earlier this month, the infrastructure AI chipmaker soared over 10% in the last week. It also gained 5.6% last Thursday after announcing at a conference that it secured a new, large customer for its AI chips. AI revenue quadrupled in the last quarter and it is being speculated that the new customer is Amazon or Apple. AVGO has already gained back most of the earlier March losses and may be poised to make a new high. You can’t keep this one down for long in the current AI craze.” BUY

Cisco Systems, Inc. (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Value Investor, keeps holding in the 49-50 range. There’s been no news. A move above 50 would be bullish. Shares have 32% upside to Bruce’s 66 price target. And the stock trades at just 13.2 times forward earnings estimates. BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, was down 2.5% this week, getting knocked back near its March lows on no news. In his latest update, Mike wrote, “CrowdStrike (CRWD) has a great, long-term story and has had a big run from the market lows—but not only has the stock stalled out since mid-February, it saw a ton of selling/churning after its big earnings pop and it’s basically a lone ranger in the cybersecurity space, with most peers (like PANW, ZS and S) looking sick. We think the stock can move higher over time, but right here, we’re going to book a little partial profits—because our position isn’t huge, we’ll sell 20% of our shares (one-fifth of what we own) and give the rest room to maneuver.” We advised booking profits on up to a third of your original position several weeks back, as we have a gain of close to 100% since adding this to the Stock of the Week portfolio last September. We’ll keep CRWD on buy, though a dip below 315 support could prompt us to downgrade to Hold. Stay tuned. BUY

Dave & Buster’s (PLAY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was back with a vengeance ahead of earnings tomorrow (April 2), bouncing off 60 support to reach new 52-week highs above 64. Analysts are looking for 20% EPS growth on 6.9% revenue growth in the quarter. This retail turnaround story has beaten estimates in three of the last four quarters. BUY

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, gave its gains from the previous week right back, dipping back to 45 after trading as high as 48. In his latest update, Mike wrote, “DraftKings (DKNG) was yet another stock that rested for a few weeks and lifted to new highs last week (on solid volume, too), only to get whacked today, along with other players in the group. The supposed reasons were two-fold: First, one U.S. senator is asking DraftKings and FanDuel how they target big gamblers (in an apparent worry over gambling addiction), while a second piece of (likely less important) news was that the NCAA is looking to outlaw prop bets when it comes to individual college players. To be frank: Today’s action was very ugly for DKNG, though, as opposed to competitor Flutter (FLUT, which owns FanDuel), the stock is holding north of its moving averages and is back in an area of support. We bought a bit more last week and are sticking with a Buy rating tonight, though we’re keeping our eyes open and could take some action if the selling persists.” We will too. In the meantime, we still have a 55% gain on the stock in seven and a half months. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was down 2% this week, though is still holding above its March lows. The stock hasn’t fully recovered since the FDA pushed back a decision date on approval of its promising Alzheimer’s drug candidate, donanemab. Analysts had anticipated a decision in the first quarter, but now it will be later this year. No matter. Mounjaro, its blockbuster weight-loss/diabetes drug, is a heck of a flotation device to keep the stock afloat – and possibly thriving – until the donanemab ruling is rendered. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, is on a tear, up 30% in the last three weeks as momentum in the cannabis sector builds with several major industry catalysts either on the near horizon (DEA rescheduling marijuana from a Class I to Class III drug; the SAFER Banking Act) or underway (legalization in Germany).

In his latest update, here’s what Michael had to say about Green Thumb specifically: “Green Thumb reported a 7% year-over-year increase in fourth-quarter revenue on February 28 to $278 million. Revenue growth in the fourth quarter was primarily driven by the strength of its popular brands RYTHM, Dogwalkers, Incredibles, and Beboe, and increased sales in Maryland, which expanded to rec-use sales on July 1.

“The company reported earnings per share of a penny or $3.2 million compared to a net loss of $51.2 million, or 22 cents a share in the prior year.

“Gross profit for the fourth quarter was $142.7 million or 51.3% of revenue compared to $124 million or 47.8% of revenue for the fourth quarter 2022. The company reported $71 million in cash flow from operations. It ended the quarter with $162 million in cash.

“Green Thumb continued to strategically position itself in markets that look poised to expand to recreational uses sales. It opened six RISE Dispensaries in Florida and one in New York. Green Thumb ended the year with 91 dispensaries across fourteen states. The day after earnings, Green Thumb announced it opened its 15th Florida dispensary. The company also made major wholesale investments in New York, Minnesota, Virginia, New Jersey, and Florida, ‘markets that we anticipate will grow considerably in the years to come,’ said president Anthony Georgiadis.

“’Adult-use sales are on the horizon for Virginia, Ohio, and Minnesota and potentially other states where we operate like Florida and Pennsylvania,’ said CEO Ben Kovler in the earnings call.

“For the full year, revenue came in at $1.1 billion a 4% increase over the prior year. Cash flow from operations was $225 million an increase of 42%. Gross profit was $526.5 million or 49.9% of revenue versus $504.0 million or 49.5% in 2022. Net income for the full year was $36.3 million or $0.15 per share, compared to net income of $12.0 million or $0.05 per basic and diluted share in the prior year.

“On February 28, 2024 the company authorized an increase in its share repurchase program by $50 million, bringing the total remaining repurchase plan to approximately $60 million.

“’As I look to the future in 2024 and beyond, I am very optimistic,’ said Kovler. ‘We have industry-leading brands that are gaining momentum, the best team in the business, a loyal and growing customer base, and the financial flexibility to keep riding the Green Wave.’ Big picture, Kovler said that over the next five years, there will be 18 million new cannabis consumers in the U.S., and two million fewer alcohol consumers.”

Bottom line: There’s a lot to like about the cannabis sector and Green Thumb in particular right now. It’s a good time to buy, especially on dips. BUY

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was exactly even in its first week in our portfolio. Intuitive is a mega-cap biotech that is the maker of the da Vinci, a robotic surgery platform. And now it’s out with its latest version, the da Vinci 5, which has 10 times the computing power, better surgical precision and the option to use a host of proprietary, high-performance surgical tools that were previously provided by outside vendors. Eventually, the new da Vinci will be a financial windfall for the company, and investors are getting out ahead of it: shares are up 17% year to date and 34% in the last six months. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, is hitting new all-time highs above 47! Here’s what Tom said about it in his latest update: “Although this newest portfolio addition is currently selling near the 52-week high, it is still reasonably priced at less than 1.6 times book value and most other valuation measures below the 5-year average. It also pays that safe and high dividend every single month with a strong possibility of supplemental dividends over the course of the year as well. MAIN should also provide strong total returns over time generated by its largely successful small business portfolio.” BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, is still hovering near all-time highs. The company is reportedly planning a $100 billion data center project with OpenAI that would include an artificial intelligence supercomputer called Stargate. The AI-friendly data center wouldn’t launch until 2028, but it’s the latest evidence of Microsoft’s leadership position within the AI space – the reported $100 billion price tag would value Stargate at 100 times the cost of the biggest existing data centers. If AI (and bigger data centers) are the future, Microsoft will be a major part of it. It’s one of the many reasons I think MSFT should be a part of every long-term investor’s portfolio. BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, got knocked back a bit this week, falling about 3.5%. There was no news, although its new original show 3 Body Problem has become something of an overnight sensation. Big picture, Netflix is in fine shape, and shares are up 25% year to date. The dominant streaming video company has fended off big-name, well-funded challengers from Amazon, Apple, Disney and others, and has emerged stronger than ever, mostly because of popular original series like 3 Body Problem, Squid Game and Love Is Blind. Like MSFT, NFLX should be part of any long-term investor’s portfolio. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, has been on steady decline in the last month, falling from highs near 136 to 127 as of this morning. And yet, shares of the Ozempic and Wegovy maker are still up 23% year to date and 60% in the last year. If you don’t already own the stock, I’d buy the dip, especially with shares holding above all their moving averages. BUY

Nutanix (NTNX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been in the 62-65 range for the past month-plus. In his latest update, Mike wrote, “Nutanix (NTNX) is another name whose long-term trend looks great—after such a persistent run, it would be unusual (never impossible, but unusual) for the stock to simply up and die here. That said, like many things, the near-term is looking iffier—since its earnings move at the end of February, the stock has stalled out and, recently, has seen some distribution. Still, we’ve already taken partial profits here, and the stock is currently less than 10% off its peak, so it’s hardly imploding. We’ll stay on Buy, but like most stocks, we’re watching it closely and could move to Hold if the 50-day line (now approaching 60) breaks.” Good advice. We’ll do the same. BUY

Palantir Technologies Inc. (PLTR), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had a bad week, falling 7% to dip near six-week support in the 22.7 range. A dip below that level could prompt us to reassess the stock. But the AI trend persists, and Palantir is a leading AI platform provider. BUY

PayPal (PYPL), originally recommended by Carl Delfeld in his Cabot Explorer advisory, touched as high as 67 before pulling back to 66, where it was a week ago. That’s just a fifth of the share price it reached three years ago. And yet, revenues are more than 17% higher during those three years. This dominant online payments company has become severely undervalued, and it seems Wall Street is starting to realize it. BUY

PulteGroup, Inc. (PHM), originally recommended by Mike Cintolo in Cabot Growth Investor, just keeps rising, advancing to new highs above 119, up from 101 in mid-February. In his latest update, Mike wrote, “PulteGroup (PHM) looks totally fine, gapping to new highs after the Fed meeting last week and pushing a bit higher since (setting new highs today). With mortgage rates holding about 1% below their peaks from last year, housing activity is picking up a bit—the February housing starts report showed starts up 6% and completions up nearly 10% from a year ago—which, in general, should be a help to Pulte. We’ll stay on Buy, though pullbacks would mark better entry points.” BUY

Qualcomm, Inc. (QCOM), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was up to 172 from 167 and has recovered nearly all its mid-March losses. In his latest update, Tom wrote, “Qualcomm is secretly one of the best semiconductor and AI stocks to own. It had been held back by cyclicality, both in semiconductors and smartphones. But the negative cycle is ending, and AI is coming to mobile devices. QCOM cooled off after a huge rally in which it had risen 22% YTD and 65% since late October. It looks like the mobile device chip maker will simply bounce around with the technology sector in the near term. A breather would probably be a healthy thing for the stock. But the rest of the year looks strong as Qualcomm is also introducing new AI chips for PCs and smartphones and is well positioned for the next phase of the AI craze.” BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, had another down week, dipping from 55 to just under 53 on no news. In his latest update, Carl noted, “The company is investing more in logistics in its home turf of Southeast Asia, where it has an edge. Its gaming group, Garena, has partnered with an India-based hosting and storage company so it may be close to gaining approval to bring Free Fire back to India.” We’ll stay on Buy, though a third straight down week could change that calculus. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, was down 1.5% but remains within the 740 to 780 range it’s been in for most of the last two months. We have a 35% gain on this large-cap cloud software stock, but it may be running out of steam. We may reassess its standing if it dips below 740, but for now, it’s in a reasonable buy range. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, just can’t seem to get any traction and has been stuck in the low 170s for weeks. Perhaps investors are waiting for tomorrow’s (April 2) U.S. electric vehicle manufacturer report. A Barron’s survey expects Tesla to report 425,000 to 430,000 deliveries in the first quarter, up from 423,000 in Q1 a year ago. That would be a modest improvement for a company that until recently was accustomed to sizable improvements every year, so it might not be enough to move the needle. So, for now, keep holding until the company gets some good news. HOLD

Tripadvisor (TRIP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, held its gains at 28. The post-Covid travel boom is alive and well, and we’re reaping the rewards with a gain of more than 40% in just over two months. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, gave most of its gains from the previous week right back, retreating from 80 to the 76-77 range. In his latest update, Mike wrote, “Uber (UBER) has stalled out with many ‘extended’ leaders, but it’s holding near its highs and has seen next to no major selling. While it’s hard to pin down, it looks like analysts see the firm’s free cash flow growing by a huge 59% this year, followed by another 33% gain in 2025, and if management executes, even those could prove conservative. Big picture, we continue to think UBER is an emerging blue chip with lots of upside if the top brass makes the right moves. We’ll stay on Buy, though pick your spots given the trickier environment.” BUY

Varonis (VRNS), originally recommended by Tyler Laundon in Cabot Early Opportunities, retreated another couple points, and it’s time to sell. In fact, Tyler did just that. Here’s what he wrote in a sell alert to his subscribers: “We jumped into security specialist Varonis (VRNS) back in November and were fortunate enough to catch an updraft into the end of 2023. We enjoyed another bump in early February when earnings came out, but since then the stock’s performance has been somewhat lackluster. Over the last few sessions, VRNS has slid below its 50-day moving average line and has also broken below its closing level the day after the February earnings-related rally. I might be making too much of this ‘weakness’ as VRNS is far from broken. But given a general malaise in security software stocks and that we’re sitting on a 24% gain that I’d rather not watch evaporate, I’m going to sell our position today.” Our gains in VRNS were a bit more modest, but a 16% return in four months is certainly nothing to sneeze at. The stock did its job, but now its momentum has evaporated, so let’s not wait around for it to return. MOVE FROM BUY SELL

Worthington Enterprises, Inc. (WOR), originally recommended by Bruce Kaser in the Buy Low Opportunities portfolio of his Cabot Value Investor advisory, is down another point, falling from 62 to 61 as post-earnings selling continues. The company reported a decline in both revenue and EPS on an adjusted basis, due partly to lower volumes in its Building Products segment. The good news was that its Consumer Products segment saw higher volumes and margins, but it’s clear Wall Street is focused on the bad news at the moment. A dip below the 61 level could be a short-term red flag. For now, the stock has simply pulled back to where it was before the report. BUY

If you have any questions, don’t hesitate to email me at chris@cabotwealth.com.

Here, too, is the latest episode of Cabot Street Check, the weekly podcast I host with my colleague Brad Simmerman. This week, Mike Cintolo joined us to discuss the state of the market, new growth sectors, and other things investing. Give it a listen!

The next Cabot Stock of the Week issue will be published on April 8, 2024.

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