Cabot Stock of the Week Issue: December 9, 2024

I’m playing a bit hurt today, having finally succumbed to my daughter’s two-week cough and cold, so I’ll keep today’s intro short and sweet. The market keeps hovering near all-time highs, with the S&P 500 just above 6,000, but pockets of weakness have emerged, with the Dow actually down last week, and a round of selling in high-flying growth stocks today, which naturally includes many of our stocks, particularly including the ones that were trading at new highs. But it’s just one day, and we’ve been warning that some amount of selling is coming given the run-up. It’s no cause for alarm just yet, but prepare for some turbulence in the coming days, especially with inflation data due out later this week.

In case the Consumer Price Index (CPI) and Producer Price Index (PPI) numbers come in a tad hot, today we add an inflation-proof company that’s in the midst of a turnaround, with higher prices likely ahead. It caught the eye of Cabot Turnaround Letter Chief Analyst Clif Droke.

Here is it, with Clif’s latest thoughts.

DexCom, Inc. (DXCM)

With inflation again on the rise, it’s time to turn our attention to an area of the market that I think is poised to rebound in the coming months despite the inflationary headwind. I’m referring to the healthcare sector and, more specifically, to the beaten-down drug and medical device makers. Stocks in the overall pharmaceutical category have had a tough time in the last half of 2024, with the NYSE Pharmaceutical Index (DRG) dropping 18% between September and November, with certain individual stocks in this category falling 30% or more.

The reason for the underperformance can be chalked up to a combination of cyclical factors and industry-specific issues, namely the hyper-elevated investor sentiment of the past few years meeting the reality of over-spending on drug development, plus lower revenue growth and sales per user in many product categories across the broader medical sector. Higher interest rates also played a factor to some extent.

But as AllianceBernstein’s co-Chief CIO and portfolio manager Vinay Thapar recently observed, “Healthcare companies are quite resilient during periods of inflation because their products are not substitutable and they deliver innovation.”

With that in mind, let’s turn our attention to one of the healthcare sector’s forgotten former leaders. The company I’m referring to is Dexcom (DXCM), 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.

Providing context for the San Diego-based company’s opportunity, consider that innovative treatments for blood sugar ailments represent a huge growth industry for medical device makers—especially given that diabetes is the single fastest-growing chronic disease in the world today. On the domestic level, the numbers are even more alarming: 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.

The company’s woes began earlier this year as investors began to worry over Dexcom’s diminished sales growth and salesforce restructuring that had a negative impact on new customer acquisition, prompting management to lower revenue guidance. Then there were worries over Dexcom’s ability to retain its market share in light of competitor Abbot Laboratories’ FreeStyle Libre CGM device. As a result, the stock tanked more than 50% from its high of 140 a share earlier this year, falling to just above 60 by late July before establishing a bottom.

Meanwhile, Dexcom is working to stabilize its position in its domestic market while further accelerating its product expansion strategies. Among its recent innovations is the Stelo biosensor, which is the first over-the-counter glucose biosensor in the U.S. for adults with prediabetes and Type 2 diabetes. It’s also available for purchase online without a prescription, which management called “a pivotal moment in the diabetes care and metabolic health landscape.”

The company also just launched its DexCom ONE wearable glucose monitoring system in France and Japan, which opens up a potential market of nearly two million new patients, with both of these markets opening up opportunities for Dexcom’s core insulin business as well. Dexcom is also opening up new market opportunities in the EU, including other markets that don’t have access to intensive insulin use for Type 2 patients. The firm said that such access will be a “big driver in the markets that we serve more than anything else over 2025.”

Key to DexCom’s recovery is the reengaging of its sales force within the firm’s durable medical equipment (DME) channel, along with addressing the factors that led to the revenue-related problems encountered earlier this year. But in view of DexCom’s established performance and double-digit sales growth in its key end markets, the company has demonstrated it has what it takes to successfully execute its turnaround strategy.

Analysts see the top line increasing 11% for 2024, with 15%-ish growth in each of the next two years as the turnaround strategy is presumably brought to fruition. But based on the strength of the pipeline, these expectations are likely to prove conservative. BUY

Current Recommendations

Changes Since Last Week:

OneStream (OS) Moves from Buy to Sell

One sell this week, as OneStream (OS) just isn’t getting the job done. We are in the fortunate position of having a portfolio filled with almost no losers, so when a stock falls 10% in its first month, like OS did, it gets a quick hook. As I mentioned in the opening, other stocks pulled back in the 4-6% range this week, but they were all stocks that were trading at 52-week or all-time highs a week ago, and so a pullback was expected. Meanwhile, AST SpaceMobile (ASTS), Broadcom (AVGO) and Tesla (TSLA), among others, had very good weeks.

Let’s get into all of it.

Updates

American Tower (AMT), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was flat this week on no news. In his latest update, Tom wrote, “This cell tower REIT trades like a REIT and is beholden to the interest rate narrative, which took a turn for the worse after the election. … But it has been trending higher again over the past few weeks. It’s a growth business as cell tower demand will increase in the future. Hopefully, another leg higher has begun.” BUY

AST SpaceMobile (ASTS), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, is up nearly 20% since we last wrote as the space-based, straight-to-smartphone broadband provider is starting to wheel and deal. The company has entered into an agreement with Vodafone (VOD), a telecommunications company that does most of its business in Europe and Africa, that will run through 2034. It’s the latest deal to help bring AST’s goal of providing space-based internet to every smartphone on the globe closer to reality. In 2024 alone, AST has now secured deals with Vodafone, AT&T, Verizon, Rakuten, Bell Canada and many others. As a result, this mostly pre-revenue company has seen its share price soar more than 300%. Given its revolutionary product, its run might just be getting started. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, was up another 1.6% this week as it appears its hostile takeover of U.K. motor insurance company Direct Line is going to work. After Direct Line rejected its initial takeover bid of 3.4 billion pounds, Aviva upped its price to 3.6 billion pounds, or $4.6 billion, which Direct Line has signed a preliminary agreement on. The acquisition would give Aviva the lion’s share of the U.K. motor insurance market, creating an entity with a combined market cap of $21.2 billion, up from its current $16.8 billion. That gives AVVIY shares 26% upside from their current price. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up about 1.5%, mostly in sympathy with the market. Indeed, this “Bull Market Stock” (Mike’s term) tends to outperform in bull markets and has lived up to its reputation, advancing more than 45% year to date and about 80% since we added it to the portfolio in August 2023. As long as the bull market remains intact, BX is likely to remain a Buy in our portfolio. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, is up more than 8% in the last week ahead of earnings this Thursday, December 12. Analysts anticipate 51.3% revenue growth and 25.2% EPS growth. It’s possible those optimistic estimates are already priced in, though the stock is still trading below its October and November highs. BUY

Capital One Financial Group (COF), originally recommended by yours truly in the Growth/Income portfolio of my Cabot Value Investor advisory, gave back a couple points after rallying in late November but is still up more than 25% in the last two months. The proposed $34 billion acquisition of Discover Financial (DFS) remains in limbo, but with an anti-regulatory administration set to enter the White House next month, it might not be long until it gets approved. When it does, it will create the largest credit card issuer in the U.S. BUY

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, is down more than 8% in early Monday trading for no obvious reason. Prior to that, shares had risen to new record highs above 150, so it’s possible this is simply a case of selling at the top, as there are signs other growth stocks are doing the same. I still like the stock and will keep it at Buy, but let’s watch how it behaves closely in the coming days. BUY

Centuri Holdings Inc. (CTRI), originally recommended by Clif Droke in his Cabot Turnaround Letter, was up from 20 to 21 after new CEO Christian Brown took the helm on December 3. Famed activist investor Carl Icahn upped his CTRI stake by 38% based on the Brown hire. If this small-cap utility pushes above 21 resistance to 22 for the first time since June, it could go on a nice little run. BUY

Constellation Energy Corporation (CEG), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is down more than 5% in the last week on no news – likely another growth stock with “meat on the bone” that sellers are coming for, at least in the short term. The nuclear energy stock has still more than doubled this year. And its deal with Microsoft to provide nuclear power to its AI-generating data centers by reopening the Three Mile Island plant in Pennsylvania will be a major cash influx if (when?) it gets approved. But it could be a rocky ride for a few days now that it’s clear sellers are out looking for growth stocks that look a bit “toppy.” BUY

DoorDash Inc. (DASH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has given back a few points but has otherwise held up pretty well since reaching new 52-week highs above 180 in late November. This mini-dip looks like a great entry point into this fast-growing online food delivery giant. BUY

Dutch Bros (BROS), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is down from 54 to 52 in the last week with most of the losses coming today on no news – again, it’s clear sellers are out in full force to start the week and coming for high-flying growth stocks. But BROS is still near 52-week highs and is coming off a big post-earnings run in which it posted 28% sales growth in the third quarter and added 38 new locations to bring its nationwide store count to an even 950. Dutch Bros has the ambitious goal of getting to 4,000 drive-through coffee stores in the next few years. A few days of selling should only put a minor dent in this excellent growth story – and perhaps create an even better buying opportunity. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was up about 1.5% this week as its late-fall resurgence continues. In his latest update, Tom wrote, “The superstar drug company stock is recovering from a big dip. LLY had been down as much as 25% since the late-summer high and nearly 20% since the earnings report fell short in late October. The stock fell after earnings as sales of the heralded weight loss drug fell short of lofty expectations and the selling accelerated as the nomination of RFK Jr. for HHS Secretary spooked the sector. But LLY is unlikely to stay down for long. It is on track to grow earnings by around 70% per year in the years ahead. The stock has already moved up 11.5% in the last two weeks.” BUY

Flutter Entertainment (FLUT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is off about 1% in the last week, with all of the losses coming today. Again, this is a stock that was trading at new all-time highs just a few days ago, so some consolidation was to be expected. In his latest update, Mike wrote, “Flutter Entertainment (FLUT) is one of the fresher names we own, having only broken free from a consolidation a couple of weeks ago on earnings. As the leading player in U.S. online sports betting (and a top online casino play, too), Flutter’s FanDuel offering is poised to get more than its fair share of the growth in North America, a market that the company believes can grow four-fold from 2023 to 2030. A pullback is certainly possible, especially as news of some potential competition appears (Robinhood is considering entering the space), but the buyers are clearly in control here.” We have a 20% gain on FLUT in just two and a half months. BUY

Freshpet, Inc. (FRPT), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, was down about 3.5% in its first week in the portfolio. There was no news. Here’s some of what Mike wrote last week in his reasoning for why he likes the stock: “If we told most investors we found a company that had 25 straight quarters of 25%-plus revenue growth, most would probably think we’re talking about some up-and-coming software outfit or revolutionary new drug firm. But instead, we’re talking about Freshpet, which has been leading the fresh pet food (almost all of its sales are dog food) movement for years; customers (especially those in good financial shape) are willing to shell out a few extra bucks so that Pumpkin and Whiskers can (according to studies) live longer, healthier lives. (The company calls this the “humanization of pets” movement.) After a couple of years when costs got out of control, the firm has been firing on all cylinders, with the top and bottom lines surging—in Q3, sales rose 26% (all of which was from volume, not pricing, which is very impressive) and EBITDA boomed 88% (EBITDA margin 17.2% vs 11.6% a year ago), with some margin metrics already ahead of the firms’ longer-term 2027 targets.”

At 150 a share, the stock is up more than 70% year to date, but still well shy of its 185 highs in 2021. For a company still growing this fast, there’s plenty of reason to think it can get back there – and then some. BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, just keeps rising to new highs, adding another 2% in the last week despite pulling back a bit this morning. JPMorgan raised its price target on the website domain registry company from 175 to 224, or 10% higher than the current price. The upgrade comes in the wake of the company’s investor event in which it 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 94% run-up in the last 12 months. GDDY shares may be getting a bit frothy, but we’ll keep it at Buy for now as the JPMorgan upgrade and promising investor event could act as new tailwinds. BUY

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, is off about 1.5% in the last week, bringing the stock back to where it was before Thanksgiving. There’s been no news. Shares of this maker of the da Vinci robot surgical system – which this year rolled out the new da Vinci 5 system – are up nearly 60% year to date. The company is coming off a solid quarter: Adjusted earnings per share grew 26% year over year while sales improved 17%. The number of procedures using Intuitive’s famed da Vinci robotic surgical system was up 18%, and its new da Vinci 5 system is becoming an increasingly bigger part of the pie; of the 379 new da Vincis Intuitive placed in the quarter (up 21.5% YOY), 110 of them were da Vinci 5s, up from 70 in the second quarter. Mind you, 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 another 8% this week, continuing to reward our faith in it after a rocky start. A rebound seemed inevitable given that the company reported a perfectly good quarter only to be met with a 16% selloff in shares. Revenue grew 33.7% to $235.1 million (beating by 3.9%) while EPS grew 62% to $0.15 and beat by $0.04. Full-year 2024 guidance (only one quarter left) calls for revenue of $923 - $925 million (+32%) vs. prior guide of $910 - $918 million. Now, Wall Street is warming to those results, and the stock is back to where was trading before earnings at just over 40 a share. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, held firm at all-time highs above 55. In his latest update, Tom wrote, “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. MAIN broke out to new all-time highs this year and just made a new one. But the improved economic outlook leaves room for further appreciation. As a cyclical play, MAIN has been hot and has moved up 10% since the election.” BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, is climbing back toward its summer highs, advancing 3.5% for a second straight week. It seems the AI narrative, and Microsoft’s leadership position within it, is back in favor, and MSFT shares are up 6% in the last month. After a sluggish first 10 months of the year, MSFT was due for a reawakening as the growth (10.7% revenue growth, 16% EPS growth in the latest quarter) is as good as it’s been in years, with more double-digit expansion expected in the next couple years. MSFT belongs in any long-term portfolio, and the stock (+74%) has been very good to us since we added it to Stock of the Week 21 months ago. BUY

Moog Inc. (MOG-A), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was down about 4.5% this week on no company-specific news. The stock is still up more than 45% year to date. Moog supplies advanced primary flight controls on the most modern military aircraft. That includes the Lockheed Martin F-35 Lightning II and the Future Long Range Assault Aircraft program. The company’s major platforms include the 787, A350 and Joint Strike Fighter (F-35 Lightning II). The company also supplies primary flight controls for the Boeing 787 and Airbus A350 widebody aircraft, as well as business and regional jets from Embraer (ERJ) and Gulfstream, owned by General Dynamics (GD). BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, moved further into record territory, breaching 900 a share for the first time and running up as high as 934 before pulling back more than 2% today. There’s been no real news since the company reported another strong earnings quarter, which sparked a round of analyst upgrades. Q3 beats on subscriber additions, revenue and operating income were enough to raise the bar among Wall Street analysts. Netflix is firing on all cylinders, and we have a gain of more than 50% to show for it. BUY

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, is down more than 3% today as its fast rise to new all-time highs above 59 surely inspired a round of profit-taking as with many other growth stocks today. Still, overall, the stock is holding up well, as Mike wrote in his latest update: “On Holding (ONON) is holding its recent rally to new price and RP peaks even after another peer got thumped on earnings (Foot Locker), which is a good sign the many weeks of hacking above and below the 50 level is over. Encouragingly, while Foot Locker was a dud, some other retail names have perked up in recent days (even before any Black Friday announcements) after a rough few weeks, which doesn’t hurt. It’s not a go-go situation, but On has all the makings of an emerging blue chip; went back to Buy last week and will stay there today.” We upgraded to Buy last week as well, and one bad day won’t shake us out of it. BUY

OneStream (OS), originally recommended by Tyler Laundon in Cabot Early Opportunities, just isn’t working out, and it’s time to sell. It’s a quick hook, having been in the portfolio for less than a month. But in a portfolio that has almost no losing stocks, one stock being down more than 10% – and trading near multi-month lows at 29 – sticks out like a sore thumb. Let’s cut ties quickly. MOVE FROM BUY TO SELL

Samsara Inc. (IOT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has given back most, though not all, of its run since mid-November, falling from 54 to 50 this week despite topping earnings estimates last Thursday. Earnings per share of 8 cents doubled last year’s 4-cent total on an adjusted basis; revenue improved 36% to $322 million; and annual recurring revenue from subscriptions rose 35%. All of those figures beat estimates. But the company – a provider of sensors and cloud-based software to manage vehicle fleets and industrial operations – issued guidance of $335 million for the current quarter, which came in slightly below estimates, and that number has stuck in investors’ craw. Samsara is a bit of a victim of its own success, which has created high expectations. Chances are, the market will come around to all the positives from the Q3 report, and the stock will bounce back in the coming days and weeks. BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, held its ground near 52-week highs above 115. Shares of this Singapore-based conglomerate that’s a play on the fast-growing Southeast Asian region are now up 185% year to date, and yet still trade at about a third of their 2021 highs. The stock has already more than doubled since we added it to the portfolio nine months ago. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up another 7.5% to top 380 a share – its highest point in more than three years! The stock is up more than 20% in the month since the election. The company reiterated its ambitious sales growth target of 20-30% in 2025. Considering the company hasn’t grown its top line by double digits in any of the last five quarters, those estimates seem aggressive. But everything seems to be coming up roses for Elon Musk these days, and in the first year of an administration in which he will serve as a Cabinet member, there’s no reason to doubt Tesla at this point. 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 December 16, 2024.

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