Cabot Stock of the Week Issue: August 14, 2023

It was another down week for the market, as the Dog Days of August continue. There were fewer earnings blowups this week, including in our portfolio, and some real success stories, as both Eli Lilly (LLY) and Novo Nordisk (NVO) exploded to new highs with double-digit gains in a matter of hours. Still, there’s no question the market has weakened this month, even though the overall damage (-2.4% in the S&P 500, -4.2% in the Nasdaq) has been pretty minimal. I don’t think it will be long before the buyers return, as new bull markets like this one almost never up and fizzle. Pullbacks – even corrections – like the current one are perfectly normal, however. We just have to endure it, cut ties with any laggards (which we do today), and keep some powder dry for when the buyers resurface in a matter of weeks or possibly even days.

With that in mind, we’re adding another big idea today with loads of growth potential. It’s a company some of you may already know well, as it’s the biggest name in a nascent industry that is growing like a weed – and should grow even more as that industry expands.

It’s a favorite of our Mike Cintolo, who recommends it to his Cabot Growth Investor readers. Here are Mike’s latest thoughts.

DraftKings (DKNG)

Many decades ago, we read about what was effectively a stock lifecycle roadmap that we’ve seen play out hundreds of times over the years with fast-growing stocks. It involved three different phases of a stock’s life: First came the Romance phase, where the stock was bid up to massive valuations based in large part on hopes and promises; then comes the Transition phase, where the warts of the story (just like in a relationship) bubble to the surface, with the stock fading back for months or years as expectations come down to earth.

And then you have the Reality phase, where a stock is judged based on actual progress and analysis of the numbers. This can be a very profitable phase if the industry is still cranking ahead and the company is executing well—and DraftKings (DKNG) is, which makes us think a long, profitable Reality phase could be underway.

The attraction here is many-fold, the first of which is that these industries still have very solid long-term potential—in the U.S., just about half the population lives in states that have legalized online sports betting, with iGaming legalization way behind that. So as legalization works its way forward (Kentucky, Vermont, Puerto Rico and North Carolina recently authorized mobile sports betting), the market obviously increases.

Second is the fact that, even in places that legalized sports betting a year or two or three ago, growth remains rapid—there seems to be a much longer “tail” of growth in these areas as more new customers sign up and those that are already members gamble more frequently. Indeed, in Q2, DraftKings said its “same-store sales” metric—growth from states that legalized activities from 2018 to 2021—saw revenues expand a whopping 70% (!) from a year ago, thanks to a 25% bump in users and a 35%-plus gain in the amount gambled. Thus, even if there were no new states that joined the party, there looks to be plenty of untapped potential here.

Third, and maybe most important, DraftKings and the entire industry have become saner when it comes to cost controls—wild sign-up bonuses have become tamer, advertising expenses are actually lower (down 10% in the aforementioned same-store sales states) and the firm is generally running a tighter ship overall. And that means after years of massive losses, margins are improving, and cash flow is turning up … with a lot more to come down the road.

In Q2, overall revenues lifted 88%, while gross margins were up 5.5 percentage points and EBITDA moved into the black, totaling $73 million; while EBITDA is expected to be negative for the year as a whole (launching in Kentucky will cost some money in Q3), the top brass sees north of $150 million of EBITDA in Q4 (football season) while 2024 gets even better with all the current trends (solid revenue growth, higher margins, much bigger EBITDA) continuing to play out.

That’s the main story, and we’re still bullish on it—though last week, there was a big new wrinkle that came into play. Penn National Gaming (PENN), which hasn’t been a leader in the sector, inked a (very expensive) exclusive deal with ESPN to launch a new branded sportsbook later this year. We actually doubt it will lead to much market share loss—at this point, the industry’s top dogs are established, and the wild west land-grab phase is mostly over. But there is a fear that the deal could bring back the bad old days of out-of-this-world incentives (if ESPN wants to make a splash) and hurt the margin improvement trends that DraftKings has been enjoying. We’ll have to see how it plays out, but history is full of supposedly scary competitive moves that flounder, and we found it interesting that, after an initial pop, PENN finished Friday by testing new multi-year lows!

Going with the evidence in front of us, we see DraftKings as the clear leader in a still-booming market that’s helping it report much better-than-expected results (Q2 revenues topped estimates by 15% or so). After a long, sloppy bottoming effort, the stock got going in late April and ran up strongly until the market dented it two weeks ago—and then the ESPN deal caused a quick dip to the 50-day line. But Friday marked a turnaround, with DKNG shares rising nearly 6%.

All told, the stock is up 158% year to date, but trading a) below its July highs above 32, and b) less than half its all-time highs of 72 from early 2021. Given that it’s a leader in such a revolutionary new (at least legally new) industry, DKNG looks like a steal at these levels.

Current Recommendations

Changes Since Last Week:
Kimberly-Clark de México (KCDMY) Moves from Buy to Sell
Eli Lilly (LLY) moves from Buy to Hold
Spotify (SPOT) Moves from Hold to Sell

For the first time in months, we no longer have a full portfolio. Not after we cut ties with two stocks today: Kimberly-Clark de Mexico (KCDMY) has performed fine but appears stuck in neutral with no obvious near-term catalysts. Spotify’s (SPOT) recent performance has been more troubling and was partially fueled by a bad earnings report, so we say goodbye to that too after the stock dipped below key support.

And while a few of our other stocks have retreated of late along with the market (or some in response to very good earnings, as detailed in our Alert on Si-Bone (SIBN) in the middle of last week), two made huge strides last week: Eli Lilly and Novo Nordisk, for mostly different reasons. It’s a good time to be a large biopharmaceutical company, I guess. As a result, our gains in both stocks are quite robust.

Here’s what’s happening with the rest of the portfolio as we slog through a down August for the market.

Updates

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, was down a tick but is still above its early-August lows. The London-based life insurance and investment management firm still boasts a 7.5% yield and shares have 43% upside to Bruce’s 14 price target. And earnings are due out tomorrow (August 15), so let’s stick with it and see what happens. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down another 5% last week and is not off to the best start since we added it to the portfolio two weeks ago. But that’s to be expected: Blackstone is what Mike calls a “Bull Market Stock,” and as the bull market has taken a breather the last few weeks, so have BX shares. Once this earnings-fueled pullback passes – which I believe it will soon – and the bull market resumes, BX should bounce back. With the stock still north of its 50-day moving average (and well above the 200-day line), this retreat sets up a nice entry point. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was down 5% in its first week in the portfolio. There wasn’t a company-specific reason for the retreat, and it was likely a product of the market sell-off, especially of companies that have shown strength year to date. Shares are still up 51% year to date and appear to have bounced off support near their late-June lows. Could be a good buying opportunity, assuming they hold up in the next few days. BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has plummeted to two-month lows, mostly for reasons having little to do with the company. Tesla slashed prices on its Model Y Long Range and Performance variants (see Tesla write-up below), specifically in China, which would put the Model Y in more direct pricing competition with BYD’s Denza, which is lower-priced. However, the price cut is equivalent to $1,930, so I’m not sure how much that will impact Denza sales; this seems like a classic Wall Street overreaction, with BYDDY shares down more than 5% today.

I still love BYD’s trajectory, with July sales up 61% year over year and 3.6% higher than its June sales. And of course, that comes on the heels of 80% revenue growth in the latest quarter and sales tripling in 2022 after the company made the switch to all-electric and battery electric vehicles. I’d wait for it to stop falling before making any new buys, but officially I will keep BYDDY on Buy for long- or even intermediate-term investors. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, just keeps hitting new 52-week highs! The fact that it’s now happening in the face of the first serious market selling pressure in months speaks to the strength of the stock and the company. The media giant is still riding the coattails of a strong Q2 earnings report: Adjusted earnings of $1.13/share increased 12% from a year ago and beat the consensus estimate of $0.98 by 15%. Revenues rose 2% and were about 1% above estimates. Adjusted EBITDA rose 4% and was about 6% above estimates. Margins expanded nearly across the board. There was a lot to like. And investors are buying shares accordingly. With a 45% gain on the stock, it’s probably worth selling about a quarter of your position if you got in early after our recommendation last November. Otherwise, I’m keeping this steady gainer at Buy. BUY

DoubleVerify (DV), originally recommended by Mike Cintolo in Cabot Growth Investor, was down another 2% this week after its earnings implosion (on good earnings) the week before. But it’s up more than 3% today, which hopefully signals a turnaround, or at least that it’s put in a temporary bottom. The sell-off was enough to convince us to downgrade to Hold last week, and Mike even sold off a few shares recently. Here’s what he had to say about it in his latest update: “DoubleVerify is one of the poster children for this earnings season so far, as it pretty much had everything going for it, from a new story to solid growth numbers to an uptrend, under control chart, and even the report itself (and outlook) was solid—but DV nosedived anyway. (One study said that the average earnings reaction of stocks that beat estimates so far this quarter was the worst since 2011.) Of course, it is what it is, so we dumped half our shares on the break, but so far have held onto the rest—mostly because the stock is back into an area of support and, frankly, the growth profile remains solid. Don’t get us wrong, we’re not just going to hold and hope with our remaining small position, but tonight we’ll hold on to the rest and see if and how well it can bounce going ahead.” Now it’s bouncing. We’ll see how long the bounce lasts, and whether last week’s bottom holds. Keeping at Hold. HOLD

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, exploded higher after an excellent earnings report last Tuesday – a rare success story this earnings season. We followed up with an Alert on Wednesday to sell about a quarter of your shares since that huge gap up bumped our gains up to 57% in less than five months and downgraded the stock to Hold for the time being.

In case you missed that Alert, here’s what Tom had to say about Lilly’s strong quarter: “WOW! Lilly reported earnings on Tuesday that blew away estimates because of soaring sales from its weight loss drug Mounjaro. Revenue grew 28% and earnings soared 85% over last year’s quarter and the company significantly raised future guidance. The market seems pleased as the stock is up over 18% on Tuesday morning to a new all-time high on an otherwise crummy day for the overall market. Diabetes drug Mounjaro, which is pending FDA approval this year for weight loss, sold $1 billion in the quarter versus a projected $740 million.

“Sales would have been higher, but Lilly couldn’t produce enough – a situation that is being remedied. Novo Nordisk also reported a 21% body weight reduction in its weight loss drug, which is prompting greater insurance coverage and a higher likelihood of the FDA approving similar drugs, which also increased the Street’s optimism for Mounjaro. By the way, Lilly is also expecting FDA approval for its other potential mega-blockbuster Alzheimer’s drug by the end of the year. It’s been a tough market for the healthcare sector. But nobody told LLY.”

The stock has kept on rising, and our return has ballooned even further, to 63%, but with shares at all-time highs, I’ll keep it at Hold for now. HOLD

GitLab (GTLB), originally recommended by Tyler Laundon in Cabot Early Opportunities, is down about 4% since we last wrote, on no news. The stock did dip below its 50-day line but bounced off the 200-day line and has had two straight up days. I’ll keep it at Buy for now. GitLab provides a source code management (SCM) platform with a host of collaboration, sharing and tracking tools for software developers. The company could be an acquisition target, is an AI play, and trades at less than half its November 2021 highs (125), so I still like it. BUY

Kimberly-Clark de México (KCDMY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was flat this week, and has been in the 11s for basically the last two months. With no obvious catalysts on the horizon, and with parent company Kimberly-Clark’s second-quarter earnings already in the rearview mirror without moving the needle much despite encouraging results, I say it’s time we step aside from KCDMY with our modest gain and make room for another opportunity down the road with more upside. MOVE FROM BUY TO SELL

Las Vegas Sands (LVS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been in retreat mode this month and is threatening to break below monthlong support at 56. I still like this Macau-centric casino operator as a play on China’s delayed post-Covid recovery but will keep it at Hold until it finds new support. HOLD

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down another 2% this week and is at its lowest point since the end of May. But this looks like a normal pullback for a stock that was among the handful of mega-cap techs that led the market out of its bearish doldrums the first half of the year and is still up 34% year to date (we have a 26% gain on it). I still like it as a leader of the artificial intelligence boom, though the AI frenzy has cooled off of late. It will be back, and so will MSFT. BUY

Neo Performance Materials Inc. (NOPMF), originally recommended by Carl Delfeld in Cabot Explorer, gapped up nicely (about 6%) on solid volume after reporting earnings last Friday. Second-quarter revenues came in at $170 million, a new record and a 1.4% year-over-year improvement. Net income and EBITDA improved as well, allowing Neo to acquire 90% of SG Technologies Group, a leader in the rare earth magnetics industry. Neo manufactures the building blocks of many technologies and advanced industrial materials. These include magnetic powders and magnets, specialty chemicals, metals, and alloys – all using rare earths and critical metals. Additionally, the stock is a hedge on rising U.S./China/Taiwan tension. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, rivals Eli Lilly as our portfolio’s best performer last week after gapping up 17% in one session! The reason? I’ll let Carl explain: “Novo Nordisk (NVO) jumped this week on data from a five-year trial from its drug Wegovy showing that users had 20% fewer heart attacks, strokes, and cardiovascular deaths, combined, than those who received a placebo in the study.

“Ozempic and Wegovy have become best-selling weight loss drugs, giving Novo Nordisk Hollywood sizzle to become Europe’s second-most valuable company.”

Supporting that narrative, Novo Nordisk reported first-half earnings on Wednesday, with net sales improving 30% and net profits up 44%. That prompted the Danish pharmaceutical giant to raise second-half 2023 revenue estimates to 27% to 33% and operating profit growth to 31% to 37%.

Shares are now hitting new all-time highs, and we have a 36% gain on the stock. If you bought early after our late-December 2022 recommendation, it’s a good time to book profits on a few shares at these elevated levels. But between the encouraging Wegovy trial results and the strong first-half sales, I’m keeping my rating at Buy. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, bounced back nicely this week, lifting more than 2% despite a down market. Perhaps investors had a chance to digest the company’s earnings from a couple weeks ago. They were quite solid: Adjusted EPS was up 46% year over year (and ahead of estimates), while revenues improved by 22.7%. But the top-line beat was narrow enough (0.99%) that NOW shares were sold off immediately following the report. While not nearly back to pre-earnings levels (590) or its July highs (603), the bounce off 550 support was a good sign. And we are now back in the black on the stock. BUY

Shopify Inc. (SHOP), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down another 3.5% on the heels of its unearned earnings blowup the week before. The shares do appear to have found a bottom at 55, however, so you could nibble at these levels. And again, the earnings weren’t actually bad: Revenues improved 30.8% year over year, beating estimates, while earnings per share of 14 cents widely outpaced the six cents per share analysts were expecting. A dip below that 55 level may force us to reassess, but for now, we’re keeping the e-commerce giant at Buy. BUY

Si-Bone (SIBN), originally recommended by Tyler Laundon in Cabot Early Opportunities, collapsed on the back of decent earnings last week, prompting us to send out an Alert. Revenue improved 30% year over year and beat estimates by $2 million, while per-share losses (the company is not yet profitable) beat analyst estimates by a penny. Also, the company raised full-year revenue guidance by $3.5 million. The stock responded by nose-diving about 14%, though shares have bounced back a bit since.

The big losses on the heels of a beat-and-raise quarterly report prompted Tyler to double down on his Buy rating. We’ll keep it at Buy too, but any dip below 20 support would indicate something is broken with the stock and would likely have us selling. Let’s see how the mini-rebound plays out for this small-cap MedTech stock. BUY

Spotify (SPOT), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, has fallen below support at 140, and it’s time to Sell. Unlike virtually all the other earnings blowups among growth stocks in this portfolio, Spotify’s was warranted, as Q2 results for the streaming audio giant missed the mark. Let’s limit our losses (a mere 5%) and say goodbye to a company that appears to be losing momentum. MOVE FROM HOLD TO SELL

Terex (TEX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, gave back some of its post-earnings gains this week, though not all of them. The pullback was likely in sympathy with the down market. The quarter was still impressive: Adjusted EPS of $2.35 blew analyst estimates ($1.61) out of the water and was a 120% improvement from the same quarter a year ago. Revenues increased 30% year over year. The company also raised full-year 2023 guidance. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, kept falling, down another 5% this past week. More price cuts, this time to its Model Y Long Range and Performance variants in China to better compete with surging BYD (see above), prompted some of the selling. Still, the price cuts were modest ($1,930, or about 4%), and probably not worthy of all the handwringing (Cathie Wood’s Ark Invest firm just sold 100,000 TSLA shares, which seems like a good counter-indicator). We’ll keep the stock at Buy, as shares are still up 93% year to date, and thus were due for a pullback, even a semi-painful one like the current monthlong retreat. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, was down another 3.5% last week, though it appears to have bounced off support at 43. In his latest update, Mike wrote, “UBER has been steadily losing altitude since earnings because of the market environment, though we continue to think the future is bright. We went over most of the earnings-related positive tidings in last week’s update, so we won’t rehash all of it, but many analysts are seeing next year’s EBITDA target of $5 billion as super conservative (one is looking for $6.2 billion), with free cash flow also buoyant, and don’t forget about Uber possibly getting some cash from its freight business, which is reportedly on the block or could be spun off. Back to the stock, we could sell a piece of our holdings if things really get ugly, but we think there’s a good chance big investors will support the stock as shares approach support (UBER is near its 50-day line here). Thus, we’ll stay on Buy for now, and aren’t opposed to nibbling here if you don’t own any.”

I agree. Let’s keep UBER at Buy. BUY

If you have any questions, don’t hesitate to email me at chris@cabotwealth.com. You can also follow me on Twitter, @Cabot_Chris.

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 21, 2023.