Cabot Stock of the Week Issue: November 18, 2024

Quick programming note: I will be traveling all next week with my family for Thanksgiving, and there will be no Stock of the Week issue next Monday. If anything major happens with any of our stocks that might necessitate a rating change, I will send out an alert. Otherwise, you will receive your next Stock of the Week issue on Monday, December 2. Happy Thanksgiving, everyone!

OK, let’s get to the market. The good vibes from Donald Trump’s election win have worn off, and the market is refocusing on things like earnings results after a topsy-turvy third quarter. Stocks haven’t given back much of their post-election gains – the S&P is only down about 1.7% from its closing high last Monday – but it’s not the go-go atmosphere that existed in the days following the election. Still, recent history suggests stocks will go up from here, with the average gains between election and inauguration after the last three presidential elections being 8.1%. Add in a still-solid economy, a Fed rate-cutting program just underway, and a bull market that has shown no real signs of slowing, and the overwhelming likelihood is that stocks will see new highs in the coming weeks and months.

Defense stocks in particular are having a moment, unfortunately. With two major global wars showing no signs of slowing, defense spending is likely to remain at record highs. So, let’s lean into the trend by adding a mid-cap defense stock Carl Delfeld recommended to his Cabot Explorer audience a couple months ago. It has continued to gather momentum since.

Here it is, with Carl’s latest thoughts.

Moog Inc. (MOG-A)

Boeing (BA) faces massive problems and Airbus (AIR.PA) manageable headwinds. This is ironic given the booming aircraft, defense and space industries.

Since these two companies represent a global duopoly in commercial and defense aircraft and space, I thought of recommending the healthier Airbus but its shares trade in Europe.

Since governments and commercial aircraft manufacturers are increasingly dependent on advanced military systems that require specialized hardware, that ratchets up the importance of a key supplier with multiple partners/clients including the Boeing/Airbus twins. Moog Inc. (MOG-A) is a stock riding a lot of momentum.

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).

Since 2020, global defense spending has grown at a 4.2% annualized rate – up roughly 4x from pre-pandemic levels, according to the Stockholm International Peace Research Institute. I believe elevated defense spending is likely to continue, because of increasing tensions and rivalries in the world.

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).

As the world’s defense spending is regrettably on a strong upward trajectory, about 50% of Moog’s sales come from space and defense, including military aircraft, with 20% coming from supplying commercial aircraft. The final 30% of sales come from industrial and medical industries.

In its latest quarter, reported on November 1, Moog reported revenue up 8.7% and net income was up 21% year over year, prompting shares to advance more than 17% in the ensuing days. The company forecasts 2.7% sales growth in fiscal 2025 to deliver revenue of $3.71 billion and a 6% EPS gain to $8.27.

Moog stock (buy the “A” shares – MOG-A) has pulled back from its post-earnings highs above 226 to 216 as of this writing, presenting a nice entry point in a stock that still has plenty of momentum, up 48% year to date. BUY

Current Recommendations

Changes Since Last Week:
Alibaba (BABA) Moves from Buy to Sell
iShares MSCI India Small-Cap ETF (SMIN) Moves from Buy to Sell

Two more sells today, with the addition of Moog Inc. (MOG-A), finally get our portfolio down to my desired 25-stock limit. With no issue next week, we will enter the last month of 2024 with a trimmed-down portfolio of almost nothing but super-strong performers. This week’s standouts include earnings winners Flutter Entertainment (FLUT), GoDaddy (GDDY), Netflix (NXFL) and Sea Limited (SE).

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

Updates

Alibaba (BABA), originally recommended by Clif Droke in his Cabot Turnaround Letter, continues its downward spiral even after a week in which it reported earnings and held its annual Singles’ Day (11/11) sales event. Net income in the third quarter soared 63%, but revenue grew by only 5%, just short of Wall Street’s 5.4% growth estimates. Meanwhile, the stock has sunk like a stone since peaking above 117 in early October, falling all the way to 89 as of this morning. Combine the weaker-than-expected revenues along with a Trump White House, which has changed the narrative on Chinese stocks from optimistic to pessimistic due to his promises of high tariffs on Chinese goods again, and I think it’s time we sell our BABA shares while we still have a small profit. MOVE FROM BUY TO SELL

American Tower (AMT), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was unchanged at 196 this week. Here’s what Tom had to say about it in his latest update: “I’m very disappointed with this cell tower REIT. Sure, REITs have been taking it on the chin a bit after the election, and interest rates have spiked higher. But AMT is down 20% since the high in September after it had been riding high. And it should be somewhat insulated from sector weakness because it deals in cell towers and mobile data growth. Earnings were weak because of a temporary lull in demand. It’s still a growth business, so I will wait a little longer to see if AMT can turn things around.” Because we got in just two weeks ago, we can afford to be patient with AMT, despite the slow start. BUY

AST SpaceMobile (ASTS), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, had an up-and-down week, with shares initially getting a boost from fellow space-based company Rocket Lab’s (RKLB) huge third-quarter earnings results, but then immediately coughing up those gains when AST reported its own results last Friday, which fell wildly short of estimates. The company reported a loss of $1.10 per share, way worse than the 20-cents-per-share loss that was estimated and down from a 23-cent loss a year ago. Also, revenue came in at $1.1 million, well shy of the $1.8 million that was expected. Mind you, as the low numbers reveal, AST is still mostly pre-revenue as the company works to get its low-Earth orbit satellites for straight-to-smartphone internet use up and running. The company launched its first five BlueBird satellites into orbit in mid-September. But clearly, it will take longer than anticipated to start generating sales. The big-picture outlook for AST improved, however, as it secured new contracts that will allow it to launch 60 more satellites either next year or in early 2026. Those satellites will provide space-based broadband coverage to the U.S., Europe, and Japan, and include service contracts with the U.S. government. The company’s ambitious goal is to eventually provide space-based broadband service around the world by launching up to 168 satellites.

So, while AST may have lost the earnings battle this week, it’s closer to winning the war, so to speak, thanks to its new contracts. In the aggregate, shares barely moved. But immense upside remains. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, had a nice bounce-back week, rising more than 3% after dipping below 12. There was no news. This U.K.-based life insurance and investment management firm is growing well (+14% operating profits in the first half of the year) and is undervalued at just 10x forward earnings estimates, 0.33x sales and a microscopic 0.06 Enterprise Value/Revenue ratio. In Cabot Value Investor, it has a price target of 14 – 13% higher than the current price. The 7.1% dividend yield adds to our total return thus far. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down 1.5% this week as the market rally sputtered. No matter. The stock was at all-time highs a week ago, so this pullback qualifies as quite modest. As long as the bull market remains intact, BX – a “Bull Market Stock,” as Mike likes to call it – should continue to outperform. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, gave back its 6% gain from the previous week and then some, falling to two-month lows around 165. But two potential catalysts loom: first, Nvidia’s earnings report this week has the potential to again lift all boats in the AI space if it hits, and second, Broadcom reports earnings of its own on December 12. We still have a sizable gain on AVGO shares; if you haven’t yet bought, this dip could be a good entry point. BUY

Capital One Financial Group (COF), originally recommended by yours truly in the Growth/Income portfolio of my Cabot Value Investor advisory, not surprisingly gave back some of its 18% gains from the previous week, tumbling about 3.5%. Insiders sold about $11 million worth of the stock, which was at least a yellow flag, but more likely was just profit-taking after a big post-election jump in the share price. The conditions for Capital One’s game-changing $35 billion merger with Discover Financial (DFS) getting approved once Trump takes office are still just as ripe as they were a week ago. Once approved, it would make Capital One the largest credit card issuer in the U.S. BUY

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, was off 6% after reporting Q3 earnings last week. Here’s Mike with the details: “Cava had elevated expectations heading into its quarterly report, but to its credit, it was able to exceed even the most optimistic views. Total sales boomed another 39%, with same-store sales up an incredible 18% and, just as impressive, 13% of that same-store gain was from traffic (not just pricing or mix), even as many in the industry are struggling with that metric. Meanwhile, earnings (15 cents, up 150%, four cents above estimates) and EBITDA (nearly doubled) boomed, with the top brass hiking the Q4 outlook and saying new stores are showing higher returns than expected (they see the store count growing north of 15% in 2025, too). Perhaps most bullish of all was the top brass’ view that they’re the clear leader in Mediterranean fare, which looks like the next big cultural cuisine category. Thus, longer term, the growth story has a ways to play out … that said, after a huge, prolonged run (both from its lows about a year ago, and from its breakout in March of this year), we’re mixed on the stock’s next intermediate-term move, especially as shares have been hit hard since its earnings gap yesterday morning. We don’t have a huge position, but given the action, we’re going to sell one-third of our remaining stake, putting a little more profit in our pocket. That will leave us with a small-ish holding and we’ll see what comes from here.” In Stock of the Week, we already sold half of our position after a big runup a few weeks ago, so let’s hold on to that half position. HOLD A HALF

Centuri Holdings Inc. (CTRI), originally recommended by Clif Droke in his Cabot Turnaround Letter, was down about 2% this week after advancing on a Q3 earnings miss the previous week. But the news remains positive for this small-cap utility, as famed activist investor Carl Icahn upped his stake in CTRI shares by 38%, partly on the promise of new CEO Christian Brown, who will take the helm December 3. BUY

Constellation Energy Corporation (CEG), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was down 4% this week to give back its gains from the previous week. The pullback was likely mostly related to the down week for the market. Constellation is coming off a solid third quarter in which results were better than expected with stellar earnings growth of 28% and revenue growth of 7% over last year’s quarter. Guidance for 2024 was also raised. And of course, all of that was before Constellation’s impending deal with Microsoft – to reopen the infamous Three Mile Island nuclear plant to help power Microsoft’s surging data center needs to support its AI efforts – kicks in. There’s a lot to like here about Constellation, and CEG shares are off to a very nice start for us. BUY

DoorDash Inc. (DASH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, held its gains after pushing to new 52-week highs the week before. That’s an impressive feat given the market pullback, and a show of the stock’s resilience. Its recent quarterly report is likely acting as a tailwind. Sales were up 25% and EBITDA improved by a whopping 52%. While sales were roughly in line with estimates, earnings per share of 38 cents nearly doubled the 20-cent estimate. It was DoorDash’s first quarterly profit since the company came public in 2020. Meanwhile, total orders from the food delivery app increased 18%, to $643 million. This online food delivery upstart is off to a very nice start for us, posting a 38% gain in just over three months. BUY

Dutch Bros (BROS), originally recommended by Carl Delfeld in his Cabot Explorer advisory, held its much bigger post-earnings gains (46%!), an even more bullish sign for this fast-expanding drive-through coffee chain. Earnings per share for the fast-growing drive-through coffee chain came in at 16 cents, well ahead of 12-cent estimates. Sales improved 28%, to $338.2 million. Also, the company opened 38 new stores across 11 states, and company-operated store revenue improved by 30%. Dutch Bros also rolled out mobile ordering in 90% of its locations. On the heels of such a strong quarter, the company upped full-year sales guidance to a range of $1.25 billion to $1.6 billion while boosting adjusted EBITDA to a $215 million to $220 million range. The company hopes to open 150 new shops in 2024; it has 950 locations after adding 38 in the third quarter. This is an impressive growth story, and we already have a solid gain on it. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was down a whopping 13% as healthcare-related stocks as a group took it on the chin due to extreme skepticism over Trump’s pick to head the Department of Health and Human Services, vaccine skeptic Robert F. Kennedy, Jr. The nominee has been particularly critical of obesity drugs like Eli Lilly’s blockbuster Zepbound and Mounjaro drugs. Is this a market overreaction? Or are the fears valid? Let’s give it some time for the market to digest the news. LLY remains one of our top performers and Zepbound/Mounjaro continue to be big sellers, despite some slippage in the third quarter. Q3 Zepbound sales came in far less than expected, and the company slashed its full-year earnings and revenue guidance. None of that is great. But the company still grew revenues by 20%, EPS is expected to more than double this year and grow another 71% next year. Lilly remains one of the market’s best growth stories. BUY

Flutter Entertainment (FLUT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up another 6% after reporting earnings last Tuesday. The stock is currently trading at new all-time highs! Here’s what Mike had to say about the report: “Flutter reported earnings Tuesday night, and they were great, flying past expectations—currency-neutral revenue rose 26% while adjusted EBITDA was up around 70%, led by FanDuel, which saw a 51% sales gain (62% growth in sportsbook, 46% in iGaming), and while Q4 has seen some bad luck so far (meaning good luck for sports bettors) in terms of outcomes, the underlying economics here (18-month payback for new customers; 10% increase in new customer acquisition totals leading to a 28% gain in active customers) continue to improve. The firm also is beginning to execute on its share buyback program that was announced at September’s Analyst Day, with $350 million likely through the end of Q1 2025. As for the stock, it’s been a tedious ride in recent weeks with tax threats causing volatility, but at day’s end FLUT etched a fresh seven-week launching pad that sat on top of its prior 16-month foundation—and now shares have broken out on the upside. If you own some, hang on, and if not, you can buy a position around here or (preferably) on dips.” Good advice. BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, tacked on another couple points after its recent earnings bump, going from 183 to 185 – a new all-time high! There was no news. The website domain registrant specialist is coming off another strong quarter in which revenue of $1.15 billion just eked past the $1.14 billion estimate, while EPS of $1.32 beat the $1.24 estimate by 6.4%. EBITDA of $366.5 million came in 10% higher than expected. Year over year, revenue improved 7.3% while EPS jumped 48%. We now have a 42% gain on the stock in just over six months. BUY

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, took a breather after a month of steady gains. There was no news. 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. After rising 10% following the earnings report, a pause in the share price makes sense and, given last week’s market downturn, is actually encouraging. ISRG has plenty of momentum. BUY

iShares MSCI India Small-Cap ETF (SMIN), originally recommended by Carl Delfeld in his Cabot Explorer advisory, dipped below 80 a share for the first time since early August, which is when we bought this small-cap India stock fund. On paper, this seems like a great way to capture growth in the world’s fastest-growing major economy. But three and a half months in, it’s not really working out. Let’s sell. Perhaps we’ll revisit this fund when momentum returns in Indian stocks. MOVE FROM BUY TO SELL

Klaviyo, Inc. (KVYO), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, didn’t come roaring back after last week’s 16% post-earnings dip, but it does appear that the worst of the selling (a bottom below 34) is over. It certainly wasn’t a bad earnings report: 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. Given that healthy growth, I still think it’s only a matter of time before buyers start snatching up KVYO shares again, perhaps when the market rebounds. 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 52. In his latest update, Tom wrote, “As a BDC … 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. At the same time, not only does it yield 5.5% based on the regularly scheduled monthly dividend, but the yield is 7.9% if you include the supplemental dividends, which have been coming regularly for the last several years. MAIN should be a beneficiary of the changing dynamic.” BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, held steady around 415. Wall Street is increasingly bullish on the stock, however, as Alternative Investment Advisors was the latest hedge fund to take out a large position in MSFT, with a $4.5 million stake. Earlier this quarter, British Columbia Investment Management Corp, New Harbor Financial Group LLC, and Nippon Life Global Investors Americas all increased their MSFT positions. It’s clear institutional investors are still high on Microsoft’s leadership position in the AI wars, which is perhaps the biggest reason MSFT belongs in any long-term growth portfolio. BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, added another 5% since our last issue in part because of Mike Tyson and Jake Paul. Netflix dipped its toe into live sports by airing the much-hyped boxing match between the 58-year-old and the YouTube sensation last Friday, and while the match itself didn’t live up to the hype, it delivered major eyeballs for Netflix: 60 million homes tuned in to watch. That bodes well for Netflix’s next attempt at airing live sports, when Chiefs-Steelers and Ravens-Texans air exclusively on Netflix on Christmas Day. Netflix is already the most dominant streamer in the world without live sports. Adding that coveted demographic could put even more distance between Netflix and the rest of the field. BUY

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, pulled back from 53 to 51 after reporting earnings last week. Here’s what Mike had to say about it: “ONON has been all over the place since reporting earnings on Tuesday morning, but to our eyes the report did nothing to dispel the growth story. Currency-neutral sales lifted 33% overall, and just like in Q2, the growth was seen everywhere, including a 51% gain in direct-to-consumer revenue; a huge 86% sales gain in the Asia Pacific region along with a 35% gain in the Americas; and, when it comes to product lines, On saw footwear up 33%, apparel up 35% and accessory sales rising 56%, all while brand awareness is growing quickly but still at relatively low levels vs. some of On’s huge peers. (To be fair, the non-footwear categories make up just 5% of total revenues at this point, but that’s up from zero a few quarters ago.) Some of the earnings metrics were messed up by currency movements, but EBITDA rose 48%, so everything appears on track. As mentioned above, ONON has been volatile since the release, first tanking, then surging to new highs, then dipping back a bit—but, at this point, the stock is trading near its prior highs (and near where it was before the report). We’re going to stay on hold a bit longer, but if the stock can stay up here or advance further, it should provide a decent entry point.” Let’s do the same. Keeping at Hold. HOLD

OneStream (OS), originally recommended by Tyler Laundon in Cabot Early Opportunities, had a rough first week in the portfolio, falling 10%. There was no news. The retreat in the share price is a bit of a head-scratcher given the strong earnings results the company reported the week before. revenue grew by 21% to $129.1 million (beating by $5.1 million), with subscription revenue growing 39% to $110.7 million. That’s a rare growth rate in software these days.

Adjusted EPS of $0.08 beat expectations by $0.08.

Analyst reaction to the earnings report was extremely positive, with data from FactSet showing 11 analysts increased their growth estimates. Part of the reason is that OneStream is gaining traction with its Sensible ML product, which is being charged for as a separately priced AI product, a rarity among application software companies.

The likely reason for the pullback in shares is something Tyler warned us about last week: lockup expiration, which was last Monday, November 11. With the stock having a good run since its July IPO, some profit-taking among insiders was to be expected. But the further we are removed from lockup expiration, expect buying to resume in this financial software company. Management is hoping the company’s software will become the operating system for modern finance, freeing CFOs and finance departments from the tedious, error-prone and time-consuming workarounds that other departments have shed by adopting comprehensive cloud-based software platforms. BUY

Samsara Inc. (IOT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down about 6%, a normal pullback given a) the 14% runup in shares the week before and b) the selling in the market last week. In his latest update, Mike wrote, “We’ve been following and writing about Samsara for a few quarters now, and the underlying growth story oozes emerging blue chip, with the firm’s cloud platform to help firms manage, track and optimize the use of physical assets a straightforward idea that’s been a hit. After endless ups and downs, IOT’s three big-volume weeks after earnings in early September marked a change in character, and the six-week rest that followed was normal, with shares hitting new highs this week before pulling back today. We followed our usual plan, starting with a half-sized (5% of the portfolio) position and will look to buy more if the buyers remain in control. Earnings are due out on December 5.” BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is up more than 10% since reporting earnings last Tuesday. As Carl noted, “The Singapore-based company reported overall net income that beat estimates at $153.3 million, with a better-than-projected 31% rise in revenue for the September quarter. Despite tough competition from Chinese firms, Sea has raised the commissions it charges merchants in many core markets by about a third since the start of the year. Sea’s e-commerce value of goods sold climbed a higher-than-estimated 25% to $25.1 billion. The company focuses on consumers in the Southeast Asia region, offering e-commerce, digital entertainment, and digital financial services.” SE shares have now nearly doubled since we added them to the portfolio in March. Better yet, they still trade at less than a third of their November 2021 highs. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, pulled back a bit, but not much, as shares of Elon Musk’s EV giant continue to ride the high of the Trump victory and what it means for a company whose founder is now part of Trump’s cabinet. The stock got another bump this morning after Trump vowed to institute regulations for self-driving vehicles, which have mostly been theoretical but have been inching closer to becoming a mainstream reality. When it happens, it could open up a whole new revenue stream for Tesla, which has big plans for self-driving cars once roads are ready for them. 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 2, 2024.

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