Cabot Stock of the Week Issue: December 23, 2024

Programming Note: My daughter turns 9 next Monday, so you will receive your next issue of Cabot Stock of the Week a day later than normal, on Tuesday, December 31. Until then, Happy Holidays!

By now, all the “Jerome Powell as Market Grinch” jokes are well worn, with the Fed chief again throwing cold water on the rally last week by forecasting fewer rate cuts in 2025 (just 50 points, according to the FOMC’s famed dot plot) than many had expected. Really, the Fed meeting took what had been an under-the-surface market selloff into an above-ground one, with a record losing streak in the Dow and December weakness in small caps and value stocks expanding to the S&P 500 and the Nasdaq.

But Friday’s bounce-back and today’s mostly positive stock action are encouraging. It’s possible the worst of the selling is already over. We probably won’t know the answer this week, with Wall Street mostly on vacation and trading volume light. But in preparation for what I believe will be another productive year for the market in 2025, we add a mid-cap water company that recently caught the attention of Tyler Laundon in his Cabot Early Opportunities advisory.

Here it is, with Tyler’s latest thoughts.

Primo Brands (PRMB)

Back in 2016, I added a small bottled water company to my Cabot Small-Cap Confidential advisory service. We did well on the stock. But what I remember most is how much fun I had researching the story of Billy Prim, the company’s founder, and his journey to starting Primo Water.

The short version is that he was traveling in Paris in 1989, saw a propane cylinder exchange display, and returned to the U.S. to start Blue Rhino, the propane exchange brand that still exists today. He eventually sold Blue Rhino to Ferrellgas Partners, L.P.

Primo Water was his next adventure. It followed the same business model as Blue Rhino.

Primo set up water exchange locations so that customers could drop off a water jug and grab a full one. He also set up refill stations, something that wasn’t possible in the propane business given the regulations and risks.

It worked.

But of course, Primo’s business model wasn’t all that difficult to emulate. Over the years other bottled water brands popped up, driving waves of consolidation in the bottled water and delivery industry.

Fast forward to June 17, 2024.

On that day Primo Water and BlueTriton announced they would merge to “create a leading North American pure-play healthy hydration company” in an all-stock transaction.

The pitch for the new company, Primo Brands (PRMB), is that it will enjoy an estimated $200 million in annual cost synergies within three years of closing and generate a combined $6.5 billion of revenue and $1.5 billion of Adjusted EBITDA in the 12 months ended March 31, 2024.

There will also be room for more M&A and better potential to go head-to-head with premium important brands Perrier, San Pellegrino, Fiji and Aqua Panna.

Primo Water’s annualized dividend of $0.36 will continue as well, until a long-term dividend policy for the new company is announced.

Primo brings its brands Primo Water, Mountain Valley, Crystal Springs, Sparkletts and Alhambra. BlueTriton brings Poland Spring, Deer Park, Ozarka, Ice Mountain, Zephyrhills, Arrowhead, Saratoga and Pure Life, as well as the home and office delivery business, ReadyRefresh.

The merger just closed on November 8, 2024. After an initial dip, likely due to a delisting in Canada, PRMB stock looks fantastic.

The new company holds well-recognized hydration brands across retail, club stores, restaurants, hospitality, convenience stores, hospitals, schools and offices. It has direct-to-consumer offerings through its Water Direct (delivery), Water Exchange (customer refill) and Water Refill (self-service) businesses.

Primo Brands even sells water filtration units for home and business customers.

Pre-merger, both companies were growing revenue in the mid-single digits and had low to mid-single-digit volume growth. We won’t get combined company financials until February but should see trailing four-quarter revenue of around $6.7 billion.

I like this story, so we’re jumping in.

As for Primo stock, PRMB’s chart goes back decades but what really matters is the trend since the merger closed on November 8 when PRMB was trading near 25. There were initially a couple of days of volatility due to forced selling as PRMW was delisted in Canada, then a surge of buying pushed PRMB above 28. The stock has continued to gain altitude since, pushing above 30 on December 6 and staying firm in the low 30s since. BUY

Current Recommendations

Changes Since Last Week:
American Tower (AMT) Moves from Buy to Sell
Freshpet, Inc. (FRPT) Moves from Buy to Sell
Moog Inc. (MOG-A) Moves from Hold to Sell

It’s tax-harvesting season, so it’s time to clean house! While not making wholesale changes – we simply don’t have that many losing stocks to harvest! – we are saying goodbye to three underperformers, two of which are getting admittedly quick hooks. The losses on all three stocks are modest – no more than 14% – which when counterbalanced by the many double- and triple-digit (and one quintuple-digit!) winners in the portfolio makes for a very strong total return for long- and even intermediate-term Stock of the Week subscribers. Assisted by a bull market, 2024 has been a very good year for our portfolio. Here’s hoping for more of the same in 2025.

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

Updates

American Tower (AMT), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was off another 6%, prompting Tom to sell last week. Let’s do the same, and take the tax losses from this disappointing stock. MOVE FROM BUY TO SELL

AST SpaceMobile (ASTS), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, dipped back below 23 and has now given back all of its mid-December rally. In his latest update, Tyler wrote, “AST SpaceMobile (ASTS) has been up and down, but over the last couple of months, the stock price is basically unchanged. The company recently signed a long-term deal with Vodaphone (through 2034) for space-based cellular broadband connectivity. Vodaphone also placed an order for its first Block 1 BlueBird gateway, which connects data from satellites to hand-held devices. Looking forward to updates from management regarding the launch schedule for 2025 and 2026, which should include approximately 60 block 2 BlueBird satellites. I am also very interested to hear when this service will first be available to consumers in the U.S.” Despite the recent pullback, ASTS has been a revelation for us, nearly doubling since we added it to the portfolio in July. Given the ambitious scope and potentially revolutionary product, I think there’s way more upside ahead – and the recent dip looks buyable for those haven’t yet bought. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, has finalized its agreement to buy Direct Line Insurance Group for 3.7 billion pounds ($4.65 billion), creating the largest motor insurance company in the United Kingdom. The deal is expected to be completed by mid-2025. AVVIY shares are down more than 6% since its Direct Line takeover bid was first reported on November 27 – which is normal share price action for the acquiring company. But shares should eventually bounce back, as the Direct Line addition should give this U.K.-based insurance and investment management firm a market cap of $21.2 billion, up from its current $15.4 billion. That gives AVVIY shares 37% upside from their current price. The 7.5% dividend yield should tide us over until shares get going again. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had a rough week, down 10% as the market pulled back. That’s the downside of owning a “Bull Market Stock” (Mike’s term) like Blackstone: It generally outperforms in a bull market, but when stocks endure short-term pullbacks like we saw last week, BX tends to fall even further. Still, the bull market remains very much intact, and BX has been very good to us, up 62% since we added it to the portfolio in August 2023 – nearly double the 32% gain in the S&P 500 during that time. As long as the bull market remains intact, BX should continue to outperform, despite some volatility in the short term. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, predictably had a down week after exploding 36% the previous week on earnings and bullish commentary from the CEO about its immense AI potential. This week’s 7% retreat is rather modest given that run-up and the market’s sharp decline since. In his update last week, Tom wrote, “Holy cow! This semiconductor and software company and artificial intelligence juggernaut really got a boost from earnings last Friday…

“The company soundly beat expectations. But it was the positive AI comments by management that really juiced the stock. The company said demand for its AI chip (XPU) is booming and expects it to generate revenues between $60 billion and $90 billion by 2027. Revenue was $12.2 billion in fiscal 2024. There appears to be a shift in the AI market in Broadcom’s favor and revenues could be even higher. AVGO has now joined the ‘magnificent seven’ stocks as the only stocks with market capitalizations over $1 trillion.

“After such a huge move in just a few days, the stock probably got ahead of itself in the near term and is beyond the ideal BUY price. … The longer-term prognosis is still excellent but the short-term is more challenging at this point. It is downgraded to a HOLD on price alone.” We did something similar last week, electing to sell half of our position to book profits on our 180% gain in just 16 months, and to let the remaining half ride. We will continue to Hold a Half position. HOLD HALF

BYD Co. Ltd. (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, swam against the market’s current in its first week in the portfolio, rising 3% last week. That’s an encouraging start. In his latest update, Carl noted that BYD “announced a new EV model which after subsidies is priced at just $7,000. The company confirmed that it will sell 4 million EVs this year as BYD has already surged past Tesla in terms of sales. At about $108 billion in market capitalization, BYD stock costs just 23 times annual earnings and 20 times annual free cash flow compared to Tesla’s 117 P/E ratio and its price-to-free cash flow ratio of 413. BYD is also the world’s largest EV battery maker.” BUY

Capital One Financial Group (COF), originally recommended by yours truly in the Growth/Income portfolio of my Cabot Value Investor advisory, was off 3% this week on no news, so likely in sympathy with the market pullback. Its proposed $34 billion merger with Discover Financial (DFS) still hangs in the balance, though it’s likely to get approved sometime next year, perhaps in the first half of the year. If approved, it would instantly become the largest credit card issuer in America. The stock caught Warren Buffett’s attention long before the proposed merger; it remains in his Berkshire Hathaway portfolio. BUY

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, is having a rough couple weeks since peaking above 150 in early December. It’s down 22% since then, but remains one of our portfolio’s biggest bright spots, having nearly doubled since we added it in April. In his latest update, Mike wrote, “Cava Group (CAVA) has an awesome cookie-cutter story that’s not close to over, which means the stock almost surely hasn’t hit a point of peak investor perception. However, even great growth names can have huge downturns: Looking back, Chipotle (CMG) had one deep downturn that wasn’t bear market or food poisoning related … and it took 48% off the stock back in 2012 over many months. We’re not predicting any specific drawdown figure, but after a massive run from its lows late last year (and even from its breakout in March), CAVA is looking weary, with the recent straight-down action through support levels suggesting the intermediate-term tenor has changed. Near term, of course, shares could bounce, but having ridden the stock for months, taken partial profits a couple of times and seen our remaining small position slip, we’ll take the rest of our profit off the table and look for greener pastures when the market firms up. SELL.”

So, Mike’s out. Does that mean we should bail too? Not yet, and the reason is because we sold half our position a few weeks ago, when the stock was near the top, so we’ve already booked a massive profit. Let’s see if CAVA can bounce back once the calendar flips to 2025. If not, we’ll follow Mike’s lead and sell the rest of our position too. As he wrote, this fast-growing fast casual restaurant’s expansion story is far from over, so let’s hold right in case there’s a rebound ahead. HOLF HALF

Centuri Holdings Inc. (CTRI), originally recommended by Clif Droke in his Cabot Turnaround Letter, was down a point, from 21 to 20, on no news. New CEO Christan Brown took the helm at the beginning of the month, on December 3. Famed activist investor Carl Icahn upped his CTRI stake by 38% in this small-cap utility based on the Brown hire. BUY

Constellation Energy Corporation (CEG), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was off 6.5% this week and is testing its November lows around 224. In his latest update, Tom wrote, “CEG has been pulling back like most stocks that got hot after the election. But it’s still up 109% YTD and 29% since being added to the portfolio four months ago. Earnings have been strong, but the stock is really being powered by future growth prospects in terms of large energy deals with technology companies. Constellation made a huge deal with Microsoft (MSFT) to provide power to a new data center with a reopening of the Three Mile Island generator.

“Other energy and tech companies have since inked similar deals. Tech companies have to secure power sources for the massive energy demand of AI. Constellation is a prime candidate with dependable carbon-free power. The new administration will likely bring a more friendly regulatory environment, making more deals likely.” Because of that likelihood, we’ll keep CEG at Buy for now despite the recent weakness. BUY

DexCom, Inc. (DXCM), originally recommended by Clif Droke in his Cabot Turnaround Letter, was up from 76 to 78 after launching the first generative AI platform in the glucose biosensing space. The new platform will, according to a press release, “analyze individual health data patterns to reveal a direct association between lifestyle choices and glucose levels while providing actionable insights to help improve metabolic health.” The product is called Stelo, and its Weekly Insights feature was made available to users last week. It will give users more personalized tips and education regarding diet, exercise and sleep.

DexCom’s new GenAI product adds to its appeal as a prime turnaround candidate.

DexCom is a leading provider of continuous glucose monitoring (CGM) systems—a big advancement over traditional intermittent monitoring—which help intensive insulin and type 2 diabetics more efficiently manage their blood sugar levels. These devices are placed on the back of a patient’s arm and steadily measure their blood sugar, then transmit the data they collect to their smartphone or Apple Watch.

At least one in 10 Americans have some form of diabetes, 25% of U.S. healthcare dollars are spent on diabetes patients, and by some estimates, as many as one in every three(!) people suffer from pre-diabetes. All told, that leaves a massive market opportunity for Dexcom.

With the stock trading at less than half its 2021 highs (161) and yet projected to grow sales and earnings by double digits both this year and next, there’s value here – especially with an entirely new catalyst in Stelo. BUY

DoorDash Inc. (DASH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, finally cracked, falling 4.5% this week. Though, as Mike notes, the stock has only fallen to its 50-day line, which is better than most stocks can say after the last few weeks of under-the-surface (now above-the-surface) selling. We still have a very solid gain, and Truist just raised its price target from 180 to 217 – 27% higher than the current price. Keeping at Buy unless shares dip decisively below that 50-day line. BUY

Dutch Bros (BROS), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has been impressively resilient, holding firm at 52 this past week despite the market downturn, and is actually up in the last month. In his latest issue, Carl noted that “investors appreciate its growth and profitability. Expanding the physical footprint is the key growth strategy as the company operates 950 stores today, more than double from the end of 2020. Management has set an aggressive target of having 4,000 locations open in the next 10 to 15 years.” Up 70% in just four months, BROS has quickly become one of our best performers. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was up slightly this week after the FDA approved Zepbound as a treatment for sleep apnea, potentially opening up an entire new market for the obesity drug. It’s the first prescription medication to be approved for the sleeping disorder that interrupts breathing during sleep. In a Phase III trial study, Zepbound was found to achieve remission in 42% of patients with sleep apnea, compared to just 16% in the placebo group. In the same study, Zepbound patients lost 45 pounds on average, or 18% of their body weight. Combined sales of Zepbound and Mounjaro, Lilly’s diabetes treatment drug, were $5.4 billion in 2023; they are now projected to reach $62.6 billion by 2030, according to data firm GlobalData. BUY

Flutter Entertainment (FLUT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down 5.5% this week. But Mike isn’t worried, as he noted in his latest update: “Flutter Entertainment (FLUT) is one of many growth names that (a) has fallen off of late, but (b) looks fine overall, holding near its earnings gap from November and above its 50-day line and the top of its prior consolidation (both in the low 250s), with light-volume selling thus far. To be fair, we’re not big fans of seeing its closest peer (DraftKings, DKNG) lag badly, but that’s been going on for a while. A drop back below 250 would have us at least going to Hold, but all in all, we think the action here is normal and many of the firm’s recent updates (including starting a share buyback program) should help the cause. Hold on if you own some, and we’re OK starting a position if you’re not yet in.” Good advice. Let’s do the same. BUY

Freshpet, Inc. (FRPT), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, was down yet again, falling from 147 to 142. Let’s get rid of it. Yes, that’s a very quick hook after just three weeks in the portfolio, but it’s fallen all three weeks, and is down nearly 10% already. Probably more a function of bad timing than anything else, after the fast-growing pet food company gapped up from 132 to as high as 156 in early November. But it’s now given back a majority of those gains. Perhaps we’ll revisit the stock down the road. But for now, it’s a sell. MOVE FROM BUY TO SELL

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, pulled back about 2.5%, which isn’t much considering the stock has been carving out new all-time highs on a regular basis of late. There was no news. The latest news came in early December, when the company held its investor event. Among other things, GoDaddy outlined plans to introduce a paid tier, Airo Plus, for its new AI-driven Airo tool. The $5-a-month Airo Plus includes automatic logo creation, SEO optimization, and enhanced marketing efforts for websites. The offering will help monetize its Airo feature, introduced a little over a year ago, and a big reason behind the stock’s 100% run-up in the last 12 months. BUY

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was down more than 4% this week despite Truist raising its price target on the stock from 570 to 640 – 22% higher than the current price. It’s the fifth price target hike by a major Wall Street firm in the last month. The maker of the da Vinci robotic surgical system has been gathering momentum from the release of its da Vinci 5 system. Of the 379 new da Vincis Intuitive placed in hospitals in the most recent quarter (up 21.5% YOY), 110 of them were da Vinci 5s, up from 70 in the second quarter. The company is in the midst of a gradual launch of the da Vinci 5 and plans to ramp up in 2025, kicking off a multi-year replacement cycle. BUY

Klaviyo, Inc. (KVYO), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was up 9% this week to reach new all-time highs above 43! In his latest issue, Tyler wrote, “Klaviyo (KVYO) has gone from acting well to blasting off, with shares breaking out to new all-time highs this week. There’s been some positive press around how Klaviyo’s software solutions for retailers have helped its customers deliver record-breaking results between Thanksgiving and Cyber Monday. That’s likely one of the reasons KeyBanc recently boosted its share price target.” Loop Capital also upped its price target today, from 45 to 60 – 37% higher than the current price. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, tacked on another point to reach new highs above 56. There’s been no news. The high-yielding monthly dividend payer is delivering for us in terms of both income and share price appreciation. As Tom explains, “Main’s portfolio of companies not only makes high-interest loans, but it also takes equity stakes. The equity stakes are the primary reason the total returns have been better than just about every other BDC.” BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, pulled back about 3% in the last week, likely in sympathy with the market. But things have been looking up of late for Microsoft, as Tyler notes: “Microsoft (MSFT) has woken up from its three-month-long nap and is finally creeping higher again. The stock is just 3% from its all-time high (from July). There isn’t a specific catalyst, other than potentially more confidence that Azure remains on track to accelerate in the next three quarters.” BUY

Moog Inc. (MOG-A), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was down another 5% this week, and even Carl has thrown in the towel on this supplier of flight controls for modern miliary aircrafts. With a 10% loss in just over a month, let’s sell as well and get the tax break. MOVE FROM HOLD TO SELL

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down about 1% and has cooled some since topping 930 for the first time a couple weeks ago. Considering the market weakness of late, however, the pullback has been modest. And there are great things ahead for the company, with it airing its first-ever NFL games on Christmas Day and Season 2 of its smash hit “Squid Game” dropping this Thursday. Viewership for the two NFL games will be quite the litmus test. If it gets enough eyeballs, as expected, Netflix will likely join Amazon, Apple and other streamers in the live sports viewership fray. And given Netflix’s reach and financial might, that could be bad news for the other streamers. BUY

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, remains in a range between 55 and 59, where it’s been for the last month. In his latest update, Mike wrote, “On Holding (ONON) has pulled somewhat with everything else, but its action has been well within the normal wiggles the stock usually sees. The firm has been quiet on the news front, but beyond the unknowns of tariffs and currency movements, all signs tell us business should remain solid for a while to come. A drop back into the 50 to 52 area would be iffy (could have us going to Hold or possibly trimming), but so far ONON is handling itself well.” BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was down about 4.5% and has slipped some since touching new highs above 117. But it’s been a banner year for the stock, and has been one of our top performers, exactly doubling since we added it to the portfolio in March. This multi-pronged Singapore-based conglomerate still has plenty of upside: amazingly, it trades at less than a third of its 2021 highs. I think it has way more room to run in 2025. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, gave back about 5% after soaring to new all-time highs the previous week. No surprise there, given the market weakness. It probably won’t stay down long: A Monday note from Barclays estimates that Tesla’s fourth-quarter deliveries will come in at 515,000, which would get it to 1.8 million deliveries in 2024 – a new record. TSLA shares have had a huge bounce-back year, up 74%, with all of the gains coming in the six weeks since Donald Trump won the election and subsequently installed Tesla CEO Elon Musk in his Cabinet. A round of price target raises from the likes of Wedbush, Deutsche Bank, Goldman Sachs and Morgan Stanley have since followed, as most believe the Trump White House will be a game changer for Tesla’s autonomous driving and AI features, which have heretofore been mostly theoretical. If true, Tesla’s rally might not be over. 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 we welcomed on Wall Street Zen’s Editor in Chief Steve Reitmeister, whose quantitative approach to investing has helped him triple the market’s returns over the last two decades.

Happy Holidays!

The next Cabot Stock of the Week issue will be published on December 31, 2024.

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