Cabot Stock of the Week Issue: January 13, 2025

*Note: Your next issue of Cabot Stock of the Week will arrive next Tuesday, January 21 due to the market holiday next Monday, January 20 in observance of Martin Luther King, Jr. Day.

The market is in a correction.

OK, technically speaking, that’s not true, as the S&P 500 and Nasdaq are “only” 4.5% and 5.7%, respectively, off their highs. But beneath the surface, the picture is much uglier, as the Equal Weight Index has pulled back 7.5%, small caps are down 11% from their November highs, and other growth titles have gotten smacked around, while the number of NYSE and Nasdaq stocks currently trading at 52-week lows totals more than 650. Yikes.

This week could be pivotal, as we get important inflation gauges on Tuesday (Producer Price Index) and Wednesday (Consumer Price Index), Q4 earnings season gets underway, and dual conferences are being held in the retail and healthcare space. Catalysts for a turnaround loom, but right now, the bears are in control.

One sector that continues to soar in the face of all the selling is the airlines. After a record-setting year of airline travel, several major airline stocks are flourishing. And they might not be done yet. So today, we add one of the most high-profile airline names, as recommended by Clif Droke in his Cabot Turnaround Letter.

Here it is, with Clif’s latest thoughts.

American Airlines (AAL)

During the Covid years, the “friendly skies” were anything but happy for the airline industry and its customers. The restrictive measures of that era put the entire $1.2 trillion air travel industry into a tailspin, causing massive financial losses and layoffs for the major carriers, not to mention major headaches for travelers.

However, after major improvements throughout 2023, the past year has capped off a major turnaround for the industry despite continuing cost pressures. Indeed, 2024 was a record-breaking year for major domestic airlines, with the Transportation Security Administration (TSA) screening over 900 million passengers at airport checkpoints across the nation, and with air travel also breaking a record during the recent holiday season.

But the good news for passenger airliners doesn’t stop there. The addition of new routes and increased competition—especially from budget airlines—has led to more affordable airfares, with international ticket prices also projected to further decline in response to increased air routes and a greater number of flights, particularly on transatlantic and transpacific routes.

These factors, combined with improved on-time flights across the industry, are expected to result in 2025 being quite possibly the best year ever for U.S. airlines in terms of revenue as “consumers continue to prioritize experience over goods” (in the words of one major airline executive).

Collectively, these trends are benefiting American Airlines (AAL), the world’s second-largest airline as measured by scheduled passengers carried, revenue, passenger miles and daily flights. And if recent company metrics are any indication, the carrier is poised to benefit from the expected continued improvement in the travel demand backdrop in 2025.

A brief list of the positive factors in the airline’s favor includes: better on-time performance compared to industry peers, improved short-term bookings and lower fuel prices, not to mention the benefits that will almost certainly accrue over time from the falling interest rate environment—all of which bode well for the airliner’s continued recovery going forward.

On the performance front, despite disruptions and financial impacts from recent extreme weather events, American reported the highest flight completion rate among U.S. network carriers. It also registered its best Q3 in terms of load factor since merging with U.S. Airways in 2013 in a major show of efficiency and reliability.

The company also just highlighted its efforts at minimizing flight cancellations while maximizing on-time departures during high-traffic periods like the recent holiday season. The firm’s efforts, moreover, have led to an industry-leading on-time flight performance of approximately 75%, which further underscores American’s dependability compared to previous years.

Fundamentally, American Airlines compares favorably to its sector peers across a number of key metrics. Its current forward P/E of around 7.3x is far below the sector median of 9.2x, underscoring its attractive valuation—especially given its revenue and EPS growth improvement since the dismal days of 2020-21. Meanwhile, the forward EV/EBITDA multiple is currently 6.6, which also places it in a favorable position compared to industry peers.

The top brass has also lately emphasized that among its top priorities is the improvement of operational and profitability adjustments to meet its financial goals. While the firm’s debt currently exceeds its market cap ($33 billion versus $12 billion), American continues to de-leverage and was expected to reduce total debt by at least $15 billion from peak levels by year-end 2025, with a major Wall Street institution forecasting that American’s debt will likely be reduced nearly 20% by the end of 2027.

Going forward, consensus estimates are for American’s annual revenues to continue improving in the next four years as the company executes on its turnaround plan. Earnings, meanwhile, are expected to improve by a notable 45% year-on-year in 2025, with an additional 30%-ish improvement in 2026.

For investors with a long-term timeframe, we think the stock looks reasonable for nibbling around current levels, or on minor weakness, with an eye toward an intermediate-term upside target of 30 and a short-term target of 21. BUY

Current Recommendations

Changes Since Last Week: None

No changes to the portfolio again this week, as while many of our growth stocks were down in the 3.5-4% range in a weak market this past week, we had a considerable cushion on almost all of them, and a few were coming off very strong starts to 2025 the previous week. Eventually, we’ll need to trim the portfolio back a bit, likely starting next week. But we’ll see what the market winds bring this week.

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

Updates

AbbVie (ABBV), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was down about 3% in its first week in the Stock of the Week portfolio as the big pharma company had to eat a $3.5 billion impairment charge for a failed schizophrenia drug, Cerevel. Still, as Tom notes, “The company is turning the corner as newer drugs are taking over and revenues are expected to soar in 2025. The main thing holding ABBV back will fade (this) year. It performed well in a crummy (2024) and much greener pastures lie ahead.” So, if you didn’t buy on last week’s recommendation, you can now get this mega-cap dividend payer at a better price. BUY

AST SpaceMobile (ASTS), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, has been ping-ponging between 21 and 24 for the last month and is right in the middle of that range. The company just struck another deal to help it achieve its lofty direct-to-smartphone, space-based internet service: an agreement with Ligado to provide 45 MHz of mid-band spectrum for direct-to-device satellite applications. The modest deal – for 4.7 million penny warrants of ASTS Class A shares – is the latest in a string of new partnerships (including a big one with Vodaphone) that should help AST get closer to its goal of providing broadband to smartphones across the globe via low-Earth-orbit satellites. 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 about 8% since the company’s Direct Line takeover bid was first reported on November 27 – which is normal share price action for the acquiring company. But shares are hitting new nine-month lows as of this writing on no news, so the worst of the selling isn’t over. Still, 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 $15.5 billion. That gives AVVIY shares 37% upside from their current price. The 7.5% dividend yield should tide us over until shares can get their act together. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is off about 4% in the last week along with the market. BX is what Mike calls a “Bull Market Stock,” meaning it tends to outperform in bull markets, as it has since we added it to the portfolio in August 2023. But it also falls further than the market when stocks are down, which has been the case lately, with BX shares now 17% below their late-November highs. I do not believe the bull market is collapsing before our eyes, however, and therefore think BX will bounce back – perhaps swiftly – once the market can get going again. You could buy here in anticipation of a likely rebound or wait for the next sign of life from the stock. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, pulled back about 5% in the last week as tech stocks have come under pressure of late. In his latest update, Tom wrote, “Sure, AVGO came off the high. But it had to. That’s why it was downgraded to a hold. But it is hanging tough near the top of the range, indicating that it is likely to hold the recent gains. This semiconductor, software and artificial intelligence juggernaut really got a boost from earnings earlier last month. AVGO soared 38% in the two days following the report. 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. The revelation has captured the imagination of investors. The stock returned 116% in 2024 and the future for the stock still looks bright.” Having sold half our position following that 38% post-earnings rally, we will continue to hold the remaining half of our position. HOLD HALF

BYD Co. Ltd. (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, tumbled 3.5% this week and is currently trading at its lowest point since September. The company did nothing wrong – it just reported that 2024 global deliveries came in at 4.3 million cars, with 1.76 million of those being pure EVs – just shy of Tesla’s 2024 delivery total. There’s still massive upside here, but BYDDY stock is currently getting caught up in the market selloff and its own China baggage. BUY

Capital One Financial Group (COF), originally recommended by yours truly in the Growth/Income portfolio of my Cabot Value Investor advisory, is down 3.5% in the last week on no news. The company reports earnings next Tuesday, January 21. Its proposed $34 billion merger with Discover Financial (DFS) still hangs in the balance, though it’s likely to get approved sometime this 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

Centuri Holdings Inc. (CTRI), originally recommended by Clif Droke in his Cabot Turnaround Letter, is back up above 20 a share, right where it was around Christmas. Holding firm in an otherwise spiraling market is an encouraging sign. There’s been no news for this small-cap utility since new CEO Christian Brown took the reins on December 3 – a move that convinced famed activist investor Carl Icahn to up his stake in the company by 38%. BUY

Constellation Energy Corporation (CEG), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, has exploded in the last two weeks after inking $1 billion in contracts with the U.S. government. The stock is up an incredible 25% in January, despite pulling back about 7% today after bursting to new all-time highs above 300 last week. In his latest update, Tom wrote, “It was a big week for Constellation. The nation’s largest nuclear energy producer was awarded more than $1 billion in contracts to provide 13 government agencies with electricity beginning this year. The contract is the largest of its kind ever and underscores the desirability of carbon-free electric power that is in high demand as electricity use skyrockets from AI. CEG soared over 13% in just two days after the announcement of the contract. Tech companies must 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 friendlier regulatory environment, making more deals likely.” We now have a 59% gain on this stock in just over four months. You could buy today’s sharp decline if you’re not yet in. BUY

DexCom, Inc. (DXCM), originally recommended by Clif Droke in his Cabot Turnaround Letter, is off more than 4% after the company reported preliminary, unaudited fourth-quarter earnings results this morning. Revenue improved 8% for the quarter and 11% for the year, and the company expects revenue to accelerate to 14% growth this year. Official results won’t be released until February 13.

DexCom is a leading provider of continuous glucose monitoring (CGM) systems—a big advancement over traditional intermittent monitoring—which help intensive insulin users 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.

The stock trades at less than half its 2021 highs (161) and recently got a boost after launching the first generative AI platform in the glucose biosensing space. The product is called Stelo, and its Weekly Insights feature was made available to users earlier this month. It will give users more personalized tips and education regarding diet, exercise and sleep. BUY

DoorDash Inc. (DASH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, gave back the 4% it had gained the previous week. But overall, the stock is holding up fairly well this month. There’s been no news for this online food delivery company other than that it will report fourth-quarter and full-year 2024 earnings results on February 11. We have a better than 30% gain on the stock in just five months. BUY

Dutch Bros (BROS), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has been our best performer of late, though it did pull back from 57 to 55 today after an 11% bump to start the year. Wall Street is taking notice of this fast-growing drive-through coffee chain: There have been three analyst upgrades in the last week alone. Baird upgraded the stock to “Outperform” and raised its target from 60 to 70; Barclays upgraded to “Overweight” and nearly doubled its price target from 38 to 70; and Stifel maintained its “Buy” rating but hiked its target from 53 to 62. Earnings per share for 2024 are expected to grow 50% (from 30 cents to 45 cents) from 2023 and are expected to swell to 55 cents this year. Meanwhile, the company should soon top 1,000 locations after opening 38 in the third quarter to reach 950 stores. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, has been getting well at a time when most stocks have been ailing, up more than 3% this week. The big pharma company is adding to its drug portfolio, buying Scorpion Therapeutics’ experimental cancer therapy for $2.5 billion. The oral therapy is currently in the trial phase and is being tested for breast cancer and other advanced tumors. After a rough stretch to end the year, LLY seems to be in recovery mode, up 8.5% in the last two months. BUY

Flutter Entertainment (FLUT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to hold firm, which is a sign of resilience and support in a down market. In his latest update, Mike wrote, “FLUT and its peers have been steadily softening in recent weeks as more and more data points came out suggesting this fall’s NFL season was a historically good one for favorites (best in two decades reportedly), which are popular among bettors. And on Tuesday night, Flutter confirmed just that, saying U.S. Q4 revenue and EBITDA would come in well below expectations due to unfavorable (for them) betting outcomes. However, the firm also said the international business looked good in the quarter, and that its ‘structural’ revenue margin (which strips out abnormally good or bad luck) was 14.5%, in line with expectations, so the underlying business is very likely healthy. As for the stock, we’re not going to let our profit completely evaporate here (cost basis just under 231) and shares have been weak … but we also have a ton of cash, and the action is more tedious than awful. Long story short, we’re holding our stake here, though if all’s well we’d expect FLUT to find support around this area.” With a solid gain and the stock appearing to set up a solid-looking base, we will maintain our Buy rating. BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, is finally encountering some weakness, down 3.5% in the last week and 8% in the last month. We still have close to a 50% gain on the stock. There’s been no news, but after shares nearly doubled last year, this website registry leader is finally succumbing to sellers who are coming after stocks with meat on the bone. Currently trading right around its 50-day line, if it breaks decisively below that level we may downgrade to Hold. BUY

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, has been all over the map of late, dipping as low as 521 and rising as high as 551, all on no news. Perhaps next week’s (January 23) earnings report will give the stock some direction. Intuitive is the maker of the da Vinci robot surgical system used in hospitals, and it recently released the da Vinci 5, which is still in the early rollout stage. Next week’s earnings report could be quite revealing as to how quickly the new da Vinci is being adopted. BUY

Klaviyo, Inc. (KVYO), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, has fallen to one-month lows despite price target hikes from Piper Sandler and Wells Fargo. The mid-cap software solutions stock appears to be making believers out of Wall Street even as the stock has been in a slump along with much of the market in the last month. BUY

Kyndryl Holdings, Inc. (KD), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, gave back about half its 13% gain from the previous week but is still off to a solid start since we added it to the portfolio two weeks ago. There’s been no news. Kyndryl is a mid-cap IT infrastructure and consulting provider that was spun off from IBM three years ago. Most of the Fortune 100 companies depend on Kyndryl’s technology, and most of their contracts with the company yield high-single-digit margins. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, is down from 59 to 57 in the last week but is the type of reliable (monthly) dividend payer that you want during market corrections like this one. Case in point: the stock is up 4% in the last month, at a time when most other stocks have gone south. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, is down more than 3% in the last week and is nearing two-month lows. Piper Sandler did raise its price target on MSFT from 470 to 520, or 25% higher than the current price. The company hasn’t done anything wrong of late, and the stock is getting caught up in the Magnificent Seven selling that’s picked up in the last couple weeks. But Microsoft remains a leader in the artificial intelligence arms race and is investing $80 billion in AI-enabled data centers this year alone. So there’s no reason to doubt the company or the stock. If anything, this pullback creates a decent entry point. BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, fell about 5% in the last week ahead of next week’s (January 21) earnings report. There hasn’t been much news for the streaming giant since it aired two NFL games on Christmas, rolled out season 2 of its smash-hit original series Squid Game, and debuted WWE’s popular Monday Night Raw earlier this month. Three analysts have upped their price targets on the stock in the last month. The recent selling is likely market-related, nothing more. BUY

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, remains mostly stuck in a range between 55 and 59, though it’s testing the bottom of that range today. Mike recently downgraded the stock to Hold, citing the “overall environment—shares are actually holding near their 50-day line (better than 70% of all stocks), though have sagged recently on more tariff uncertainty with the new administration and the general soft tape. The company will present next Monday afternoon at the ICR Conference, which features a ton of top retail names; occasionally presenters will release some guidance (official or not), so we’ll have to see what (if anything) comes with that. Should the market find support soon, we think ONON could easily move to new highs, but we always go with what’s in front of us, so we’ll move to Hold.” Let’s keep the stock at Buy pending today’s ICR Conference presentation. If it closes below 55, we may have to reassess our rating. BUY

Primo Brands (PRMB), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, just keeps holding around 31, despite some fits and starts. There’s been no news since we added it to the portfolio last month. Primo is a unique water/hydration company that started as a way for customers to refill water jugs at designated refill stations, and last year formed an alliance with Blue Triton, which owns Poland Spring, Deer Park and other recognizable water brands. The newly formed company did $6.5 billion in revenue in the 12 months ending March 31, 2024. The merger just closed on November 8, and the stock has since taken off. 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.

The first quarter of combined financial results should be released in February. BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has been in a range between 105 and 108 this month, taking a breather after a year in which the stock more than doubled. Sea remains one of our favorite stocks in the portfolio, as a play on Southeast Asian growth that has a huge presence in e-commerce (Shopee), digital finance services (SeaMoney) and digital entertainment/gaming (Garena). Even after a monster year, the stock trades at less than a third of its 2021 peak. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, tumbled about 3.5% this week to dip below 400 a share. Morgan Stanley isn’t swayed. It says TSLA could double from here to 800 a share, in a bullish scenario, citing the company’s natural AI advantages including “data collection, robotics, energy storage, AI/compute, manufacturing and supporting infrastructure.” Analyst Adam Jonas says Tesla could sell 7 million vehicles by 2030 with 26% gross margin, but with much of Tesla’s value coming from autonomous driving, network services and ride sharing by that point. So the recent 19% pullback in TSLA shares – after a much bigger run-up – has not deterred at least one prominent Wall Street firm. 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 talked the state of the market with Mike Cintolo.

The next Cabot Stock of the Week issue will be published on January 21, 2025.

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