Cabot Stock of the Week Issue: June 26, 2023

Note: With next Tuesday being the Fourth of July holiday, Cabot has graciously given us next Monday, July 3, off as well as sort of a midyear mini-break on the heels of a chaotic – but quite profitable – first half of 2023. So, your next issue of Cabot Stock of the Week will arrive in your inbox next Wednesday, July 5. Enjoy the holiday!

Stocks have hit a snag in the last 10 days, falling between 2% (S&P 500) and 3% (Nasdaq).

Some blamed the Fed after Jerome Powell and company doubled down last week on their “more rate hikes are coming” credo. But really, this looks like normal selling after a big run-up. The S&P is still up nearly 13% in 2023 at not quite the halfway point of the year; the Nasdaq is up 27%. We were due for a pullback. After all, just a week earlier the Fed hinted at possibly two more rate hikes before year’s end, and investors scarcely blinked. I don’t think the Fed puts the fear of God in investors’ hearts the way it did during the depths of the 2022 and even early 2023 bear market. This is just normal consolidation in the midst of a new bull market.

So, with stocks pulling back, let’s take advantage by snatching up a great, big-name growth stock with an artificial intelligence tilt while it’s trading below its highs. It’s an e-commerce company just recommended by Tyler Laundon in his Cabot Early Opportunities advisory.

Here it is, with Tyler’s latest thoughts.

Shopify Inc. (SHOP)

Shopify (SHOP) is a cloud-based provider of e-commerce solutions, primarily for small- and mid-sized businesses.

This is a huge market. And the company’s platform with front-end website features and back-end support (order management, payments, etc.) has made it easy for companies to get up and running, then grow into much larger organizations with Shopify.

A few years ago the company began building out Shopify Fulfillment Network (SFN), a logistics business some thought could become the direct-to-consumer (DTC) counterweight to Amazon.

The problem was that capital spending to build out a legitimate SFN to rival Amazon would ramp up to north of $1 billion a year by 2025 – and stay there for a long time.

This open-ended investment cycle to build a business with lower margins than Shopify has traditionally generated was not exactly well received by the market.

That’s why shares jumped 35% over three days back in early May when management announced SFN would be sold to Flexport for a roughly $1 billion equity position (Shopify now owns about 18% of Flexport).

With this shift in strategy, Shopify is re-focusing on doing what it does best, and that means running an exceptionally successful e-commerce platform. It’s why the stock rose to greatness in the first place!

Adding interest to the Shopify-is-back story, over the last month investors have become enamored with any stock with the potential to harness artificial intelligence (AI) technology.

Shopify isn’t the first name most investors land on when thinking about AI. But it should be right up there in the top 10.

Here’s why.

First, Shopify is already one of the leading e-commerce companies out there with over 2 million sellers and nearly $200 billion of gross merchandise value (GMV) flowing through its platform in 2022. The company powers around 10% of all U.S. e-commerce.

There is a lot of room for technology to improve/streamline/personalize things.

At the top of the list is AI technology that can make it easier for shoppers to find what they want. Shopify is already using AI in its Shopify Magic solution (released earlier this year), which auto-generates product descriptions based on search keywords.

The company has also released an AI shopping assistant (March 2023) that provides product recommendations and other engagement tools (abandoned cart, etc.) for customers.

And the new Commerce Components solutions for enterprises, which integrates with Google Cloud AI, is aimed at bringing much larger retailers into the fold.

For now, these AI tools are mainly aimed at helping Shopify customers drive higher sales and better customer experiences, thereby boosting sales conversions on Shopify’s platform. This is a relatively easy lift at this point. And the technology may help Shopify do a lot more with less overhead.

Looking forward, I expect to see AI play a larger role on Shopify’s platform, including personalized advertising, human modeling for clothes, retailer storefront design, creative abandoned cart reminders, product recommendations and more.

It’s hard to see any other e-commerce player, other than Amazon, with more potential to leverage AI than Shopify.

In terms of financial performance, the company delivered a better-than-expected first quarter. Revenue should be up by at least 15% this year, then 25% next year. EPS of $0.22 this year could double next year.

Free cash flow and profit margins are set to grow significantly now that the SFN drag has been cut free.

As for the stock, SHOP came public at a split-adjusted 1.5 in May 2015. At the pandemic peak, it traded near 176 (again, split-adjusted). While revenue has continued to trend higher since forever, SHOP fell nearly 50% from its pandemic high through October 2022. After bottoming near 23.6 the stock enjoyed a tentative recovery with a few decent rallies.

But the big move was after the Q1 earnings and SFN divestment news on May 3. Shares rallied nearly 40% from 46 over three days. Over the last two months, SHOP has held up well to trade in the 55 to 65 range, with most of that time spent well above 60.

Current Recommendations

Changes Since Last Week: Visa (V) Moves from Hold to Sell

Despite last week’s market pullback, it was a much harder decision this week as to which stock should go to make room for Shopify. Ultimately, I chose Visa (V), even though a) we still have a modest gain on it, and b) neither the stock nor the company has done much wrong. Shares just haven’t really gone anywhere for a while, and yet aren’t that far below all-time highs, so the upside is limited. Most of the other stocks in our portfolio are either hitting new highs or have plenty of upside given that they’re at earlier stages in their businesses. So, we say goodbye to Visa.

Here’s what’s happening with our other 19 stocks.

Updates

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, was down slightly in its first week in the portfolio – most likely in sympathy with the down market. In his latest update, Bruce wrote, “Aviva, plc (AVVIY), based in London, is a major European company specializing in life insurance, savings and investment management products. Amanda Blanc, hired as CEO in July 2020, is revitalizing Aviva’s core U.K., Ireland and Canada operations following her divestiture of other global businesses. The company now has excess capital which it is returning to shareholders as likely hefty dividends following a sizeable share repurchase program. We expect that activist investor Cevian Capital, which holds a 5.2% stake, will keep pressuring the company to maintain shareholder-friendly actions.

“Aviva shares fell 1% this past week and have 39% upside to our 14 price target. Based on management’s guidance for the 2023 dividend, which we believe is a sustainable base level, the shares offer a generous 7.5% yield. On a combined basis, the dividend and buybacks offer (about) a 10% ‘shareholder yield’ to investors.” BUY

Brookfield Infrastructure Corporation (BIPC), originally recommended by Tom Hutchinson in Cabot Income Advisor, continued its recent decline last week, though the selling was fairly minimal. Overall, the stock is down roughly 6% since peaking just shy of 48 a share a little over two weeks ago. In his latest update, Tom wrote, “BIPC is a good long-term investment anytime, but it is particularly attractive now because it’s relatively cheap and can well navigate both inflation and recession.

“The infrastructure company reported solid earnings in the first quarter with funds from operations (FFOs) per share growth of 12.5% over last year’s quarter. The company benefited from recent expansions and acquisitions but also showed solid organic growth. Meanwhile, the average S&P 500 stock has negative year-over-year growth for the first quarter.

“Roughly 85% of revenues are hedged to inflation with automatic adjustments built into its long-term contracts and its crucial service assets are very recession resistant, and earnings should remain strong. It also helps that the stock pays a solid and growing dividend.” BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has given back about half its gains from the first half of the month and is trading right around 64 support. If it bounces, then no harm, no foul. But a dip below 64 could send shares tumbling a bit further. The Chinese auto giant expects to sell at least three million cars this year, possibly as many as 3.6 million, which would nearly double its 2022 total – a year when revenues tripled. As Carl noted in his latest update, BYD “is now the world’s largest producer of electric vehicles including hybrids and the second largest producer of EV batteries.” BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, remains in a range between 39-41. In his latest update, Bruce wrote, “Comcast seems to be incrementally moving toward an exit from its ill-fated $40 billion acquisition of Sky, the British satellite broadcasting company. Other than its strong relationship with English Premier League football, Sky seems to have little strategic value to Comcast, and, rather, has become a cloud over an otherwise clear Comcast strategy. Comcast for now seems to be taking a piecemeal approach – recently it has worked on deals to sell off its German operations, with divestitures of other operations potentially underway.

“Comcast shares were flat in the past week and have 13% upside to our 46 price target.” BUY

DoubleVerify (DV), originally recommended by Mike Cintolo in Cabot Growth Investor, didn’t budge this week, which is encouraging given that the Nasdaq was down more than 2%. In his latest update, Mike wrote, “DoubleVerify (DV) has been very impressive, not so much because it’s racing higher (we’re up a couple of bucks) but because it’s been crawling higher nearly every day, regardless of the market. This morning the firm announced a new offering today that allows advertisers on Meta Reels to ensure the video ads are both seen and safe from fraud—a potentially big move given the boom in short-form video content across many platforms. We’re tempted to average up here; we think the straight-up action since the breakout five weeks ago bodes well. That said, we’ll stand pat tonight, still thinking some sort of exhale is possible in the near term. If you don’t own any, we’re OK picking up a small position here or on dips of a couple of points.” BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, just keeps hitting new all-time highs, regardless of market conditions. The latest catalyst was news that its experimental weight loss pill, orforglipron, helped people who were obese lose 14.7% of their body fat after 46 weeks, according to data from a mid-stage trial. A year ago, Mounjaro, Lilly’s now-revolutionary obesity drug, proved to cut 22.5% body weight at a similar stage in a clinical trial. So, with two potential cash cow obesity drugs in the immediate pipeline – not to mention the company’s promising Alzheimer’s drug that’s in the works, donanemab – there are still plenty of LLY buyers out there, so we should still be one of them even with the stock at record highs. BUY

Green Thumb Industries (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, continues to recover, up about 7.5% since a late-May bottom. There’s been no news that moves the needle in the cannabis sector, with momentum toward passing the SAFE Banking Act seemingly stalled, but Green Thumb – the largest U.S. cannabis company – still looks like a bargain. BUY

Kimberly-Clark de México (KCDMY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, pulled back a bit along with the market last week after touching new 52-week highs. No cause for concern – it only gave back a little more than 2% on no news. We still have a solid gain on this Mexico-based retail stock. BUY

Las Vegas Sands (LVS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been in the same 57-59 range for most of June. There’s been no news for this Macau-centric casino operator. We have a nice double-digit gain on it thus far. A break above 59 would be bullish. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, has finally hit a speed bump after a furious run-up the first five months of the year, pulling back from a high of 348 to 331 in the last two weeks. It’s still up 38% year to date and has the artificial intelligence tailwind at its back. If you haven’t already bought the stock, this looks like a solid entry point. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is down about 2.5% in the last week in sympathy with the market. In his latest update, Carl wrote, “Novo announced an ambitious initiative to begin researching new weight-loss drugs that prevent type-2 diabetes and medical obesity. Novo’s obesity and weight loss drugs are seen as more effective than new competitors, but it will have to continue to innovate to keep its lead.” As for the stock, it’s still up 16% year to date but is testing 157 support. A break below could have us downgrading to Hold, but until that happens, it’s a Buy. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, is off about 2.7% since we last wrote. There was no news, so the mini-retreat was mostly market-driven, it appears. The stock is still up 40% year to date and is comfortably above June support around 528. BUY

Si-Bone (SIBN), originally recommended by Tyler Laundon in Cabot Early Opportunities, was unchanged this past week, which counts as a victory after a down week for the market. We’re up about 15% since adding the stock less than a month ago. Si-Bone is a small-cap MedTech company that specializes in implants that solve issues of the SI joint and pelvis. Its addressable markets are worth about $3.7 billion. So far, over 80,000 procedures have been completed by more than 3,000 surgeons. The first quarter of 2023 was impressive. Revenue jumped 46% to $32.7 million, beating by $3.6 million. EPS of -$0.41 improved by 24%. The company had 950 active surgeons (+40%) in the U.S. and 3,500 procedures in the quarter (+48%). BUY

Spotify (SPOT), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, is off about 3% since hitting 52-week highs around 160 earlier this month. There’s been no news, though Wolfe Research upgraded the stock to “Outperform” on June 21. The stock has nearly doubled this year, but still trades at just 2.3 times sales, with 14.6% sales growth expected this year. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, finally had a down week, falling 9% since we last wrote. A flurry of analyst downgrades – from the likes of Goldman Sachs, Morgan Stanley and Barclays – no doubt played a large role in the retreat, though the stock was getting a little frothy after vaulting 79% in less than two months. The only company-specific news was that Rivian (RIVN) has followed Ford and GM in signing on to use Tesla’s Supercharger network, starting in 2024. That’s another potential revenue generator for Tesla down the road. Thus, the recent analyst downgrade-fueled selling could be a prime buying opportunity if you still don’t own TSLA shares. BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, is at new 2023 highs! That’s a bullish move, considering last week’s market retreat. In his latest update, Mike wrote, “Uber (UBER) caught an upgrade earlier this week, with one analyst seeing the stock possibly being added to the S&P 500—we’d be all for it, but that’s usually a short-term thing (if it even happens), with big investors buying thanks to an ever-growing outlook for EBITDA and free cash flow. Like most things, some near-term weakness is possible, but we’re not expecting a huge retreat.” So far, there’s been no retreat, and we are now up 30% in just over two months. BUY

Visa Inc. (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor, just hasn’t really gone anywhere recently, chopping around in the 220s all month, having peaked at 234 in April. Ordinarily, we’d give this one some rope, especially since it’s a big name and we have a modest gain in it. But with a full portfolio, something has to go, and so Visa gets the chop because it’s clearly one of our weakest links, with upside that appears more limited than some of our other, younger stocks. MOVE FROM HOLD TO SELL

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, keeps holding firm in the 188-190 range. In his latest update, Mike wrote, “Wingstop (WING) is … near the edge here, tightening up in a range as it attempts to reassert its uptrend. That said, we’re also willing to give it a chance as we took partial profits earlier and because business, even if it slows somewhat, should remain in great shape. It’s getting close, but at this point, we advise gritting your teeth and holding on.” With a nice gain on the stock, we will too. HOLD

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, finally broke above 40 for the first time in more than a year before pulling back to its traditional 37-39 range. Still, momentum has picked up in June, and the fund is up more than 7% year to date. Our lone ETF offers a high dividend yield and some of the highest-quality emerging market stocks. The fund gives broad exposure with an emphasis on income and value. BUY

Xponential Fitness (XPOF), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, is in retreat mode again, though is still above support in the high 24s/low 25s. There’s been no news, and we still have a solid gain on the stock, albeit not the spectacular return we had on it just two months ago when it crept above 33. Still, it’s well worth hanging on to shares of this fitness studio/brands chain unless they give us a reason to sell – like, say, dipping below that 24 support. HOLD

Any questions or comments? Shoot me an email at chris@cabotwealth.com, or follow me on Twitter @Cabot_Chris.

The next Cabot Stock of the Week issue will be published on July 5, 2023.