Cabot Stock of the Week Issue: August 12, 2024

Things looked a bit bleak when I wrote in this space a week ago. At least in the short term. A way-weaker-than-expected U.S. jobs report, escalating tensions in the Middle East, and something called a “carry trade” in Japan all conspired to send the Nasdaq spiraling into true correction territory and push the S&P 500 to the cusp of one.

But here’s what I wrote last Monday: “(B)ull markets almost never up and fizzle so quickly, and at just 21 months old, this one would tie for the shortest bull market in history if we actually reach the dreaded 20% decline mark. The average bull market lasts 63 months. With the Fed a stone-cold lock to finally start cutting interest rates next month, … the presidential election cycle mercifully coming to an end in just three months, and most economic data points still holding up quite well besides last week’s jobs report (corporate earnings are on track for their fastest-growing quarter since Q4 of 2021), I’m betting the selling won’t last much longer.”

It’s too early to take a victory lap. We’ve already seen how much things can change in today’s increasingly volatile market climate. But I thought, in the moment, the selling was overdone given the many factors the market had going for it. And right now, it appears the mini-panic of a week ago has subsided, and investors are again focusing on all the positives.

So today, we’ll lean into the positive vibes – however tenuous they may be – and buy a normal-looking growth stock that’s been on a nice run this month even in the face of all the market turmoil. It’s a recent recommendation from Mike Cintolo in his Cabot Top Ten Trader newsletter.

Here it is, with Mike’s latest thoughts.

DoorDash, Inc. (DASH)

There’s no doubt growth stocks are in a correction right now, but that’s actually the best time to start looking for new leadership—preferably names that have established growth stories, solid sponsorship and whose stocks have recently reacted well to earnings. DoorDash fits all three categories: The firm is one of the big players in restaurant delivery, which has grown steadily for years, got supercharged during the pandemic and—as opposed to most other pandemic plays—has continued to grow nicely since then, too, and the top brass has run a tight ship, allowing margins to expand. That said, while restaurant-related growth remains the core of the business, the real potential here is DoorDash expanding into other verticals, allowing people to get groceries, beauty supplies, home improvement goods, alcohol and more delivered to their homes using the firm’s app; while the company said it’s gaining share in the restaurant field (more than half of new restaurants that sign up for a delivery partner choose DoorDash), it’s the same for other non-restaurant clients as well, where business is ramping steadily. Throw in a growing ad business (obviously its app and marketplace are a huge source of eyeballs) and results remain excellent: In Q2, order volume lifted 20%, revenue grew faster (up 23%) as the take-rate moves up (13.3% of marketplace volume), while EBITDA is booming, totaling $430 million, up a huge 54%. There is competition (from Uber and others), but it’s still early days in the overall delivery movement, even in the U.S., so there’s no reason to think DoorDash can’t grow many-fold from here, especially as churn decreases and choice among new verticals increases.

As for the stock, DASH corrected down to its 40-week line last fall but then staged a huge gap up on earnings, kicking off a great rally where shares progressed higher in a relatively smooth fashion until they reached 143 in March. Then came a sharp correction, lowlighted by a gap down on earnings in early May) that saw the stock reach as low as 100 a couple of weeks ago. But support held at that point and DASH popped back to multi-month resistance after earnings, with the 115 to 120 area looking like key resistance. It has since broken through that resistance, zooming as high as 124 last week before pulling back slightly. Having broken through resistance, a move back to its March highs – or higher – may be in order. BUY

Current Recommendations

Changes Since Last Week: None

No changes this week after a relative bloodbath (three sells, two downgrades to Hold) in the midst of last Monday’s market sell-off. Most of our stocks had good weeks – some of them regaining a large chunk of the previous week’s losses; others, like AST SpaceMobile (ASTS) and GoDaddy (GDDY), hitting new highs altogether. Let’s hope for a few more market-calming weeks like this last one. It’s good for our portfolio and our heart rate!

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

Updates

AST SpaceMobile (ASTS), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, has quickly become one of the gems of our portfolio, up 73% in the month since we added it. Last week’s announcement that the Federal Communications Commission (FCC) had granted AST SpaceMobile an initial license for space-based operations in the U.S., paving the way for space-based cellular broadband service for smartphones in the U.S., kept ASTS chugging along despite the tumultuous week for the market. This Wednesday’s (August 14) earnings report will be pivotal in determining whether ASTS can keep up this torrid pace. Expectations are modest, with a loss of 22 cents a share expected. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, had a rare and very brief dip below 12 last week but is now right back to the mid-12s, where it usually lives. The U.K.-based life insurance and investment management firm reports earnings this Wednesday, August 14; perhaps another strong report can get the stock right back to 13, where it was at the end of July, before the August market turmoil. Stay tuned. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, fell sharply along with the market but is starting to regain its form, bouncing off 127 and rising to 131 – well shy of its July highs above 143, but also well above its July lows at 120. This is a Bull Market Stock (Mike’s term), and the bull market remains intact, so we’ll stick with it despite all the market-induced gyrations of late. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, bounced back nicely after a rough stretch, adding 8% since bottoming at 136 last week. Hopefully the freshly stock-split shares can get back to their previously scheduled upswing – shares peaked around 183 in mid-June – but it’ll need more than just a few good days for us to restore our Buy rating. Keeping at Hold for now. HOLD

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, is back with a vengeance, rising to 89 after dipping as low as 76 a week ago. In his latest update, Mike wrote, “CAVA doesn’t report earnings for another couple of weeks (August 22), so we’ll have to wait a while to get clarity on results—so far, its peer group has reported fairly solid numbers, though earnings reactions have been mixed (Wingstop, Chipotle) to poor (today, Dutch Bros. was clobbered). As for CAVA, we find it encouraging that the stock’s closing low so far was actually back on July 24 and shares have bounced fairly well since then, though like everything else, there’s still work to do. Our thoughts fundamentally here haven’t changed: CAVA looks like relatively rare merchandise, with not just strong growth (including solid profits) but a story backed by a proven top brass that’s succeeded with the cookie-cutter business model before (the founder of Panera Bread is the lead investor in Cava and Chairman of the Board), which certainly adds credibility and should entice more big investors over time. At this point, shares are in a tedious but normal five-week consolidation, and the longer it can hold up in this environment, the better the odds it can round out a launching pad and resume its longer-term advance. Having already taken partial profits, we’re sitting tight with the rest, giving the stock some room to maneuver.” We downgraded CAVA to Hold as well last week after a bout of weakness. But it might be a short stint at Hold if the stock can manage another week or two like this past one. HOLD

Dick’s Sporting Goods (DKS), originally recommended by yours truly in my Cabot Value Investor advisory, bounced nicely after dipping below 200, rising back to 204 as of this writing. There was no news. Shares of the increasingly popular sporting goods chain remain cheap, trading at 15x forward earnings estimates and 1.33x sales. In Cabot Value Investor, I’ve set a price target of 250, or about 22% higher than the current price. I think it could get there quickly once the market settles into a groove. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, rarely stays down for long these days, and that’s especially true when the company reports earnings, as it did last Thursday. Sure enough, the results for the Mounjaro maker were excellent again, and shares have taken off, adding more than 100 points to recover all its late-July and early-August losses. Q2 revenue came in at $11.3 billion, blowing away the $9.9 billion that was expected and up 36% year over year, while adjusted earnings per share also easily topped estimates at $3.92, versus the $2.60 that was expected. Meanwhile, the pharmaceutical giant raised full-year guidance by a whopping $3 billion, to a range of $45.4 billion to $46.6 billion, and EPS to a $16.10 to $16.60 range, up from previous guidance of $13.50 to $14. Blockbuster diabetes drug Mounjaro ($3.1 billion in sales in the quarter, more than triple Q2 in 2023) and fast-rising weight-loss drug Zepbound ($1.24 billion in sales, ahead of the $992 million expected) were, not surprisingly, largely responsible for the boffo quarter and raised guidance, as demand continues to accelerate while supply concerns are easing. Also, Lilly is pouring money into manufacturing the two drugs, having built six new manufacturing plants and hired thousands of workers. As a result, the company expects drug production to be 50% higher in the second half of this year than it was in 2023.

Bottom line, the second-quarter earnings report confirmed what we’ve known for quite some time: Lilly is growing like an upstart biotech thanks to its new GLP-1 drugs, and with Zepbound having just completed its second full quarter of sales in the U.S., it may just be scratching the surface of its immense growth. And our portfolio continues to benefit from its presence, despite a sharp pullback in late July and early August. It’s a buy for any long-term portfolio. BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, is up 8% in the last week to reach new all-time highs above 158! Another stellar earnings report has sent GDDY shares into the stratosphere. Earnings per share came in at $1.10, edging estimates and up 76% year over year. Revenues of $1.12 billion only beat estimates by one percentage point but marked a 7.3% improvement from the same quarter a year ago. Average revenue per user ($210) increased 5.5%. The company started to draw investor interest last fall when it announced a new AI-powered solution, Airo; now it’s helping drive revenues in a tangible way, having introduced Airo to its existing 20.9 million users. It’s currently available for web domain purchases in English-speaking countries, but with further expansion into 90 other markets later this year. That AI angle is what initially drove the stock, and now it has the numbers to back it up. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, is back above 11 after dipping to as low as 10 per share last week. A solid earnings report last week helped matters. Second-quarter revenue improved 11% year over year thanks in large part to its 11 new RISE Dispensaries. Analysts were expecting 9.9% revenue growth. That top-line beat, coupled with the general momentum the cannabis sector is gathering from the polling improvements from Kamala Harris and Tim Walz – perceived as the more cannabis-friendly presidential ticket for this November – give this stock plenty of near-term upside. HOLD

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, recovered all its late-July/early-August losses in just one week and is currently trading at new all-time highs above 465! There was no news, though it seems the stock has regained its momentum from before the recent market downturn when the da Vinci robot surgical system maker had just reported another strong quarter. Worldwide da Vinci procedures were up 17% in Q2, and rollout of the new da Vinci 5 system is happening faster than expected – the company sold 70 of them in the second quarter, up from eight in Q1. Expect that number to swell fast in the coming quarters. BUY

iShares MSCI India Small-Cap ETF (SMIN), originally recommended by Carl Delfeld in Cabot Explorer, had a productive first week in our portfolio, advancing from 79 to nearly 82. The fund (something we rarely recommend in this largely stock-specific advisory) was too good to pass up because it has exposure to the faster-growing segments (small caps) of the fastest-growing major economy in the world, with India coming off a quarter of 7.8% GDP growth. As Carl noted in last week’s issue, “This is a $960 million fund that holds a basket of about 500 small-cap India stocks – many of which Western investors have never heard of since they are solely listed on domestic exchanges.

“The fund isn’t overly costly at 0.79% in annual expenses. It is nicely diversified with the top 10 stocks accounting for just 12% of assets. The lead sector is industrials at 25%, followed by finance at 15%, consumer goods at 14%, basic materials at 13% and healthcare at 10%.

“It’s a great, high-reward way to play the fastest-growing economic power in the world today.” BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, regained some of its recent losses, bouncing off 47 to reach 49 as of this morning. That’s still shy of the stock’s highs above 52 in July, but a good sign of progress. Last Thursday’s earnings report helped right the ship. Adjusted earnings per share ($1.01) met analyst estimates, and while revenues ($132.2 million) fell just shy of expectations, they still marked a 3.6% improvement year over year. This business development company that pays a monthly dividend has been a steadying, if unspectacular, presence in our portfolio, and the 2.1% yield adds to our modest return thus far. BUY

McKesson Corporation (MCK), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, fell hard after reporting earnings last Wednesday. The company missed revenue estimates by a lot – the $79.3 billion tally was $3 billion short of expectations for its fiscal 2025 first quarter – though adjusted earnings per share of $7.88 surpassed forecasts. Supply issues related to weight-loss drugs, including Lilly’s aforementioned Mounjaro and Zepbound and Novo Nordisk’s Ozempic and Wegovy, weighed on sales for this healthcare services provider. The company downgraded full-year sales and EPS guidance as a result. Still, sales improved 6.4% year over year. The stock sold off, however, falling from 617 to a closing low of 541 last Friday, though it’s up above 552 as of this writing. We’ll see how Wall Street responds to the disappointing quarter in the coming days. For now, we’ll keep MCK at Buy. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, is up about 3% after dipping below 400 the prior week due to the broad market and tech stock selloff. A bounce-back seemed inevitable, as the company is coming off another solid (though not overly impressive) quarter. Revenue and earnings narrowly beat estimates but capital expenditures reached $19 billion, up $5 billion from the first quarter and the company’s largest quarter-over-quarter jump ever. As Tyler wrote last week, “Nearly all of ramping CapEx spend is going toward cloud and AI-related investments, half of which is targeted at building and leasing data centers to support monetization over a decade and a half.

“In other words, the train has not left the station yet when it comes to making money off AI.”

AI is what has driven MSFT shares over the past two years, and despite a current soft patch (Azure growth was mildly below estimates), this remains one of the most reliable growth stories on the market – now and for the last couple decades. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, has been on a wild ride since our last issue, dipping as low as 119 after earnings last Wednesday, gapping back up to 133 on Thursday and Friday, and then dipping to 130 today. All told, the stock is up about 3% since we last wrote. Novo’s quarter wasn’t as impressive as Lilly’s, as Ozempic sales ($4.26 billion) – while up 30% year over year – trailed the $4.38 billion consensus estimate. Its other weight-loss drug, Wegovy, saw a 69% year-over-year sales bump to $1.88 billion, but that too trailed estimates ($1.96 billion). Unlike Eli Lilly, Novo Nordisk is still feeling the effects of supply shortages, namely in the semaglutide and tirzepatide shots that are essential to the drugs. Even so, Novo’s total sales grew 24%, and the company hiked its outlook for the year; it now expects 22% to 28% revenue growth in 2024, up from 19% to 27% previously. So, shares have been all over the place as investors figure out how to digest the mixed earnings. Despite the top- and bottom-line misses, Novo is still one of the fastest-growing mega-caps out there, and the stock has nearly doubled since we added shares to the portfolio in late 2022. BUY

Neo Performance Materials (NOPMF), originally recommended by Carl Delfeld in his Cabot Explorer advisory, bounced back in the last week despite reporting mixed earnings results on Friday. Revenue for the rare earths miner declined 37% year over year, though net income improved 177%, earnings per share more than doubled, and the profit margin was up four-fold, from 2 cents a share in Q2 a year ago to 8 cents a share now. The revenue number missed estimates by 20%, while EPS (2 cents a share) fell short by 76%, so this wasn’t quite the quarter Neo was hoping for. But there was enough in the report for investors to like after the stock had been pummeled the previous couple weeks, and shares bounced from $5.08 to $5.43, with all the gains coming today. That’s enough momentum to keep the stock in our portfolio for one more week at least after downgrading it to Hold in last week’s issue. Let’s see if it can build on today’s momentum. HOLD

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up 5.5% this week after falling below 600 a share for the first time in three months. News that the streamer will produce its first live sporting event this year – Christmas Day NFL games – helped matters. But more than anything, shares were oversold following another strong quarterly report as both earnings per share and revenue topped estimates; sales improved 17% year over year, and the company raised full-year guidance slightly; and membership of its new ad-supported service expanded by 34% year over year. That’s helped the streaming giant become more profitable, as EPS came in at $4.88, up 48% from the $3.29 it earned in Q2 a year ago. Given that backdrop, I wrote last week that this was a buying opportunity into one of the market’s great growth stocks. Even after a 5.5% bump, that’s still true. BUY

Ollie’s Bargain Outlet (OLLI), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, had another down week, falling from 94 to just under 90. There was no news. Shares of this bargain retailer are now down about 14% from their mid-July peak around 104, so our timing hasn’t been ideal here. But, with no real reason behind the pullback, let’s give this one more rope and view the recent weakness as a buying opportunity. BUY

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, was up a bit in the last week but remains in its recent range of 38 to 41 ahead of its Q2 earnings report tomorrow, August 13. In his latest update, Mike wrote, “On will report earnings next Tuesday morning (August 13), with analysts looking for around 18 cents per share, though because it’s a foreign (Swiss) firm, there’s often more focus on the currency-neutral growth rates regarding sales, earnings and the full-year outlook. The stock was rounding into form nicely, with some solid accumulation, before the recent three-day selling storm; even so, ONON has held its prior closing lows from early July, and the nine-week structure looks sound so far. A decisive break through the lows on earnings (or because of general market weakness) would be hard to ignore, but right here we’re holding our shares, as the story and numbers are as good as ever and the base-building effort remains reasonable.” We’ll keep our rating at Buy, but I’d hold off on any new buying until after tomorrow’s earnings report. BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, also reports earnings tomorrow (August 13). Shares bounced back very nicely this week after dipping below 60 for the first time in three months; they’re currently back up above 66. As Carl notes, Tuesday’s earnings “will be an important date as we look for confirmation that the company’s profitability is trending upwards and demonstrates some consistency since it has missed earnings expectation two of the last four quarters.” I still believe in Sea as a multi-pronged play on Southeast Asian growth that’s trading at a small fraction of its 2021 highs. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, ticked down another few points after a big slide from the 260s in late July. Yet another disappointing earnings report was the culprit. On the bright side, at 196, TSLA shares are still higher than their March-through-June peak. Perhaps the floor is higher now after Q2 deliveries came in a hair higher than expected. We’ll see. Maintaining our Buy rating for now, but another down week might change that. BUY

UnitedHealth Group Inc (UNH), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is flat in the last week after being one of the few stocks to actually get a bump the prior week. In his latest update, Tom wrote, “The previously beleaguered healthcare insurance giant got a new lease on life. After wallowing in oblivion for seemingly forever, UNH soared about 20% since early July and made a new 52-week high. Earnings drove the stock. UnitedHealth beat earnings forecasts as it added more patients and pharmaceutical customers despite a continuing negative effect on profits from the February cyber-attack. UnitedHealth also reaffirmed previous guidance for 2024. The market is apparently happy and reassured. It’s also well positioned with all the recession talk as a highly defensive stock.” BUY

United States Steel Corporation (X), originally recommended in the Cabot Turnaround Letter, is at new four-month highs above 41! In his latest update, new Turnaround Letter Chief Analyst Clif Droke wrote, “U.S. Steel (X) reported Q2 results which saw its revenue slide 18% from the year-ago quarter, although both sales and earnings of 84 cents a share beat estimates. The stock has strengthened since last week’s report, and while there are some political reasons surrounding this, Wall Street is mostly upbeat on the chances of the company’s planned sale to Nippon Steel going through. I’m maintaining my predecessor’s BUY rating on the stock.” With a solid double-digit gain after just six weeks in the portfolio, I will keep X at Buy as well in the hopes that the Nippon deal gets done soon. And if not, we can afford to wait. BUY

Viking Holdings (VIK), originally recommended by Mike Cintolo in his “Best Stocks to Buy in August” report, had a much better second week in our portfolio, regaining about half its losses from the previous week. There was no news for this fast-growing river cruise line firm, other than that it will report earnings on August 22. 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.

The next Cabot Stock of the Week issue will be published on August 19, 2024.

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