Cabot Stock of the Week Issue: November 4, 2024

The presidential election is (mercifully) almost here, so let’s talk about it.

With a 50/50 election, chances are we might not know a winner for a while. But for how long? The 2020 election was called for Joe Biden the Saturday following Election Day. In 2016, Donald Trump was declared the winner over Hillary Clinton in the wee hours of Wednesday morning. Neither of those scenarios would throw the market much. If it drags on much beyond that – if we don’t know the winner by the time you receive your next Stock of the Week issue – then Wall Street impatience may start to spark some fear-driven selling, even if it’s temporary. Regardless of your political preference, I think we can all agree that a fairly quick resolution would be optimal.

Pre-election uncertainty has ground the market to a halt, with the S&P 500 essentially flat in the last month and down 2.5% since mid-October. It’s clear that Wall Street is holding its breath, waiting for an answer – no matter if that answer is Donald Trump or Kamala Harris. Given the uncertain timetable for how long it will take to count (and recount?) the votes, it makes sense to add a low-risk dividend stock to the portfolio this week. For that, I’ve turned to Cabot Dividend Investor Chief Analyst Tom Hutchinson, who offers up a large-cap stock with a decent yield (3.1%), low beta (0.83) and some very strong earnings growth.

Here it is, with Tom’s latest thoughts.

American Tower Corp. (AMT)

American Tower Corporation (AMT) is a Real Estate Investment Trust (REIT) that owns, operates, and develops an extensive portfolio of cell towers and other communications assets worldwide. It’s a mobile communications infrastructure powerhouse with over 224,000 cell towers in 25 countries on six different continents, as well as 28 data centers in the U.S. American Tower is headquartered in Boston, has been in business more than 28 years, and has roughly $99 billion in market cap.

Cell towers are fantastic assets to own. Cell towers are those weird-looking polls you see around with boxy antennas that send and receive signals to and from cell phones and other mobile devices. They are what provide the Wi-Fi for mobile network service. Cell phones can’t work without them.

Telecomm companies lease these towers out rather than go to the added expense of building or acquiring their own. And demand for mobile data continues to grow. Cell phones become more advanced and connected to the internet as do a slew of newly enabled technologies for cars and other devices that connect to the internet. There are rapidly growing applications for video conferences, cloud services, and hybrid working scenarios.

The more advanced 5G infrastructure and the artificial intelligence applications it enables are fueling traffic growth. American Tower estimates that the average data use per mobile device will grow at a compound annual growth rate (CAGR) of 19% from 2024 through 2029. It also estimates that total mobile data traffic in the U.S. will have a CAGR of 22% over the same period.

As demand for mobile data grows, so will demand for wireless infrastructure and American Tower’s properties.

American Tower’s customers include mobile network operators, multinational telecommunications companies, media, and broadband providers. The largest U.S. customers are Verizon (VZ), AT&T (T), and T-Mobile (TMUS). These reliable customers are signed to long-term leases of five to 10 years and the towers have exceptionally low churn rates. Revenues are highly dependable, and the business has automatic growth built in.

Of the more than 220,000 towers American Tower owns, only about 42,000 are located in the U.S. and Canada. Yet, those 42,000 account for a little bit more than half of the revenues because the number of carriers and volume on each tower is much higher in the U.S. But the growth rate will be higher going forward in far less saturated international markets.

Why buy it now? The answer is that it’s cheap after two years of poor performance. The total return from the start of 2022 to the end of 2023 was -20%. That performance is despite the fact that American Tower has grown earnings at better than 10% per year on average for the last three years.

AMT suffered along with the REIT sector over the last two years in the rising interest rate environment. The strong dollar, largely the result of Fed rate hikes, also hurt performance as it resulted in lower international revenues after conversion to dollars. But interest rates are trending lower, and the Fed has begun a rate-cutting cycle that will likely last for two years.

You have a reversal of the interest rate problem and a cheap stock that has moved strongly off the lows with recent upward momentum. Despite a recent decline, AMT is up over 20% since the beginning of May but still sells 30% below the all-time high despite having higher earnings. AMT is also a stock that had soundly outperformed the market in the five- and 10-year periods prior to 2022, with 204% and 495% returns over those periods, respectively.

American Tower currently pays an annual dividend of $6.48 per share, which translates to a 3.1% yield at the current price. Reliable revenues have enabled the company to increase the payout every year for the last 12 years. In the past five years, the dividend has been raised 19 times at an average annual growth rate of 15.4%. BUY

Current Recommendations

Changes Since Last Week:
On Holding (ONON) Moves from Buy to Hold
UnitedHealth Group (UNH) Moves from Buy to Sell

One more sell this week, as we say goodbye to UnitedHealth Group (UNH), which has lost momentum since reporting fairly grim earnings guidance for this year and next. We get out of UNH with a modest gain. Meanwhile, we downgrade upstart athletic shoe company On Holding to Hold, though we’re nowhere close to throwing in the towel on that one.

The rest of our portfolio is faring well, with seemingly half the portfolio either coming off earnings or about to report them this week. Here’s what’s happening with all our stocks as we embark on a very busy week of a (likely) Fed rate cut and a presidential election.

Updates

Alibaba (BABA), originally recommended by Clif Droke in his Cabot Turnaround Letter, was down slightly on no news. The Chinese e-commerce giant will report quarterly earnings on November 15. While fervor over China’s economic and market-aiding stimulus measures has cooled off considerably and BABA shares have pulled back accordingly, they’re still up 26% in the last three months. BUY

AST SpaceMobile (ASTS), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was down 10% this past week on no news. Shares remain comfortably above their October lows, however. Earnings are due out November 14, and that will be the first window into what this space-based straight-to-smartphone internet provider – which launched five “BlueBird” satellites into low-Earth orbit in early September – is capable of in terms of revenue generation. The company has been pre-revenue until now, generating a mere $1.4 million in the last 12 months. It’s expected to bring in $24.3 million in revenue this quarter – a modest amount, to be sure, but perhaps the start of AST’s metamorphosis from a theoretical operation to a money-making venture on track to fill its immense potential. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, has been going in the wrong direction the last few weeks. News has been scant, although an investigation into the CEO of Aviva’s India division for religious discrimination in the workplace surely hasn’t been a good look. When there’s no other news, that kind of report stands out like a sore thumb. So, AVVIY shares have dipped near their August lows at 12 a share, after topping out in the mid-13s in late August. A decisive dip below 12 may convince me to change the rating. But for now, we’ll keep this U.K.-based life insurance and investment management firm at Buy as Aviva is coming off a strong first half of the year in which it reported operating profits of £875 million, up 14% from the first half of 2023 and ahead of analyst estimates. Insurance premiums increased 15%, which helped, as did a 49% boost in its protections business thanks in large part to the company’s acquisition of AIG Life earlier this year. And yet, the stock remains cheap, trading at 10x earnings estimates and at a mere 0.32x sales. The 7.3% dividend yield adds to our total return. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was flat despite a bevy of news, including that the company is on the cusp of taking a minority stake in Canada’s Rogers Communications for $7 billion, and is in advanced talks to buy U.S. shopping center owner Retail Opportunity Investments Corp. for $3.4 billion. Neither deal is done, so investors aren’t biting yet. And the lack of movement for BX isn’t surprising given a) its recent runup and b) the stagnation in the stock market of late. BX is what Mike calls a “Bull Market Stock,” meaning it tends to outperform in bull markets. While the bull market remains intact, the rally has stalled in recent weeks ahead of the election, and so has BX. But until the bull market collapses, BX will likely remain in our portfolio. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was down about 2% this week and has pulled back the last few weeks since hitting new highs above 185. The recent round of tech earnings was mixed enough to not have had much of an effect on AVGO shares, which are down since a 10-for-1 stock split in June. But the stock is up sharply since early August and even early September. And as Tom noted in his latest update, “Nvidia (NVDA), the direction of which AVGO usually mimics, has rallied over 15% in October. The rise in chip stocks ahead of earnings is an encouraging sign.” BUY

Capital One Financial Group (COF), originally recommended by yours truly in the Growth/Income portfolio of my Cabot Value Investor advisory, gave back some of its post-earnings gains this on no news. But the stock is still up roughly 3% since reporting third-quarter results. Revenue improved 6.4% year over year and narrowly topped estimates, and while earnings per share declined slightly from a year ago, they easily (by 17%) beat estimates. There wasn’t much of an update on the call about the status of the pending deal to acquire Discover Financial (DFS) for $35 billion, though company executives now concede it likely won’t happen before the end of 2024. If approved, the deal would instantly make Capital One the largest credit card issuer in the U.S. The stock remains cheap, trading at 10.6x forward earnings and at 99% of book value. COF still has more than 10% upside to the 185 price target I set in Cabot Value Investor. If the Discover deal gets approved early next year, that 185 target may prove conservative. BUY

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, is down more than 3% in the last week. In his latest update, Mike wrote, “The restaurant group has definitely become more mixed of late, with growth leader Wingstop cratering this week and blue-chip Chipotle lagging and also souring after earnings. Along with the fact that its own quarterly report is coming up (November 12) and due to its giant run in recent months, that’s likely caused CAVA to ease back some of late—though, so far, the selling pressures haven’t been very strong, as the stock is holding near its 25-day line (around 132). We’ve been somewhat conservative with CAVA in recent weeks, leaving it on Hold, and we think that’s generally been the right call; it’s obviously done fine, though it hasn’t done as well as many other growth leaders since the late-August earnings move. At this point, we see no reason to change anything—we’ll continue to hold our position and see how things go as earnings season progresses.” We will stay on Hold a Half as well, after booking profits on half our position several weeks ago. HOLD A HALF

Centuri Holdings Inc. (CTRI), originally recommended by Clif Droke in his Cabot Turnaround Letter, is set to release third-quarter earnings this Wednesday, November 6. Analysts are expecting earnings of 30 cents a share and revenue of $741 million. The stock was up 3% this week, ahead of earnings. Centuri is a small-cap utility company that partners with regulated utilities to help build and maintain the energy network that powers millions of homes and businesses across the U.S. and Canada. The stock is a recent addition to the portfolio and remains a Buy. BUY

Constellation Energy Corporation (CEG), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, beat Q3 earnings estimates on Monday morning, but a rejected proposed nuclear energy deal between Amazon and Talen Energy caused CEG shares to tumble more than 12% in early trading. Amazon paid Talen $650 million for a nuclear-powered data center campus in Pennsylvania, but federal regulators rejected the deal, citing “huge ramifications for both grid reliability and consumer costs.” The rejection of the Amazon deal may have implications for Microsoft’s record-setting deal to have Constellation Energy reopen Three Mile Island’s infamous nuclear plant to help power its data centers. But it’s too early to know if that will be the case, and today’s selloff may be an overreaction. In the meantime, the earnings were good – EPS improved 28% year over year while revenue was up 7%. Both figures were well ahead of analyst estimates. The company’s nuclear fleet produced 45,510 gigawatt-hours in Q3 – up 3% from a year ago. So the company-specific news was good. Chances are the stock will bounce back in the coming days, unless regulators decide to kill Constellation’s Microsoft deal too. BUY

DoorDash Inc. (DASH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up about 1.5% after beating earnings last week. 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. The glowing report prompted Oppenheimer to raise its price target from 165 to 180, 16% higher than the current share price. The stock is off to a nice start for us since we added it to the portfolio in mid-August. This report seems to suggest there’s plenty more upside ahead. BUY

Dutch Bros (BROS), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was off 5% this week ahead of this Wednesday’s (November 6) earnings. Expectations are for a year-over-year decline in earnings on higher revenues. Meanwhile, Starbucks recently reported that global same-store sales fell 7% in the fourth quarter. As of the end of June, there were 912 Dutch Bros outlets, with a goal of 4,000 within the next few years. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was down nearly 10% after some disappointing Q3 results last week. The big pharma company fell short of both top- and bottom-line estimates as sales of its once-booming weight-loss and diabetes drugs – Mounjaro and Zepbound – have slowed. Mounjaro sales more than doubled from the same quarter a year ago but, at $3.11 billion, came in well short of the $3.77 billion that was expected. Zepbound sales, in just their third full quarter, were $1.26 billion, well below $1.76 billion estimates. The big misses for the two drugs that have been driving LLY’s share price the last couple years were a first and have sent shares tumbling to their lowest level since early August. They also prompted Lilly to lower full-year revenue and EPS guidance. As long as shares remain above their early-August bottom (772), we will keep our rating at Buy. But if this quarter wasn’t simply a one-off and enthusiasm for Lilly’s weight-loss drugs has actually waned significantly, we may have to reassess our position eventually. For now, I’m betting that Lilly was simply a victim of “too-high” expectations after many consecutive quarters of earnings beats. BUY

Flutter Entertainment (FLUT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up about 2% this week but remains shy of its late-September highs. In his latest update, Mike wrote, “FLUT has had a very choppy month, with the U.K. tax rumors throwing a wrench into what was a great story and strong post-breakout action in September. Interestingly, after testing the 50-day line repeatedly in recent days, the stock got a bit of a lift yesterday on rumors that the U.K. might not implement higher online gaming taxes (they were absent from a key budget speech). We’ll let everyone else try to figure out the puts and takes of foreign tax proposals—but to us, the bottom line is that the stock has held up relatively well despite the potential bad news, telling us big investors are still thinking positively. We still think the upside here could be big given FanDuel’s rapid growth and huge whitespace in the U.S. alone, so we’ll stick with our plan: We’re staying on Buy as the path of least resistance remains up, but a drop below the recent lows (into the 215 area) would be iffy. Earnings are due November 12.” BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up 2.5% after reporting earnings last Wednesday that beat estimates. 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%. That’s good continued growth for the web domain registry company, which has been resurgent since introducing its first AI product, the Airo, a year ago. Shares are up more than 90% since then but are trading below their late-August highs. BUY

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, held firm after giving back some of its post-earnings gains the previous week. 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. All of that is bullish for ISRG stock – though after jumping to record highs after earnings, an extended pause makes sense. BUY

iShares MSCI India Small-Cap ETF (SMIN), originally recommended by Carl Delfeld in his Cabot Explorer advisory, gained back a point this week, rising from 81 to 82 after falling from 85 the previous few weeks as Indian stocks as a group tumbled. The SMIN is a $960 million fund that holds a basket of about 500 small-cap India stocks. It’s a high-growth way to gain exposure to the fastest-growing major economy in the world. BUY

Klaviyo, Inc. (KYVO), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, held steady at record highs above 39. We’ll see if it can keep holding recent gains – or build on them – after this Wednesday’s (November 6) earnings report. Analysts are looking for 28.7% revenue growth with EPS improving from 10 cents to 11 cents. The software company has beaten top-line estimates in each of the last four quarters. We’ll see if it can do it again. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, has pulled back from 52 to just below 50 in the last couple weeks. But the business development company’s next move will depend on Thursday’s (November 7) earnings report. Analysts anticipate 12.4% revenue growth with 3% EPS growth. If the company can top those fairly modest estimates, perhaps shares of the monthly dividend payer can get out of their current rut. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down 4.5% this week after last Wednesday’s earnings report failed to wow investors despite beating estimates. In his latest update, Tyler wrote, “The ‘issues’ are that Azure’s growth is expected to decelerate into the next quarter, and losses in OpenAI will drag on MSFT’s bottom line for several quarters ahead.

“On the flip side, the Azure slowdown is supposedly due to limited supply, not demand, and management discussed more supply coming on in future quarters, so this should be a temporary headwind. Few analysts are going to move MSFT from a ‘Buy’ to a ‘Sell’ on this report, though a few are saying they don’t see the stock doing much in the near term.

“I don’t disagree with that, especially given some uncertainty around how next week’s election will pan out. If you’re an investor, I say stick with it and look to buy once the market settles down. MSFT stock is back to where it was three weeks ago. Looking for it to firm up here.” I agree. MSFT still belongs in any long-term growth portfolio, and this post-earnings pullback seems like a good buying opportunity. BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, was mostly unchanged this week as the stock has held most of its post-earnings gains from a couple weeks ago. The results again demonstrated an industry leader firing on all cylinders: earnings per share improved 45% year over year, while revenue was up 15%. Ad-tier memberships (i.e., lower-priced subscriptions that include commercials) were up 35% and accounted for 50% of sign-ups in countries where it’s available (it’s coming to Canada in 2025). The company also added 5.1 million new subscribers in the quarter. Like MSFT, NFLX belongs in any long-term portfolio. BUY

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, had a bad week, retreating more than 7% to cough up all of the gains from the previous week. In his latest update, Mike wrote, “There’s been basically no meaningful news from On Holding in recent weeks, and little in the way of analyst commentary, too, but the stock has been jerked around by movements in the stocks of its peers. First, there was Nike’s earnings miss at the start of the month (pulled this stock down), then last week saw Deckers gap up (leading to a nice one-day pop), and then this week, Crocs and Boot Barn (the latter of which has been a leader) were clonked on earnings (yanking shares back down). When we step back, we see that ONON hasn’t given up that much ground and isn’t far below its 50-day line ... but it also hasn’t been going up much while the group is mixed. We’re not panicking, but we think it’s prudent to go to Hold and see how it goes from here.” Let’s do the same. Downgrading to Hold. MOVE FROM BUY TO HOLD

Samsara Inc. (IOT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down 1.5% in its first week in the portfolio. As Mike noted, “IOT is still in a normal rest period, with shares still living above support near the 50-day line but with upside generally capped by round-number resistance around the 50 level. Odds favor the next big move is up, and earnings here aren’t out until Thanksgiving or so.” Samsara is the pioneer of what it dubs the Connected Operations Cloud, a platform that dramatically boosts efficiencies and delivers cost savings for firms that have large amounts of physical assets, like state departments and trucking firms. BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was down 4% this week on no news. The Singapore-based conglomerate reports earnings on November 12. The stock is up 134% year to date and yet trades at just a fraction of its 2021 highs. It’s a play on the fast-growing Southeast Asian consumer, offering e-commerce, digital entertainment, and digital financial services. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, shed some of its 27% post-earnings gain from the previous week, falling nearly 10% this week. There was no real reason for the retreat other than normal consolidation following a massive run-up. TSLA stock is still up more than 17% in the last three months. The quarter was decent, by Tesla’s 2024 standards. Sales, while just shy of analyst estimates, improved 8% year over year, while earnings per share (72 cents) blew past analyst estimates (58 cents). CEO Elon Musk forecast 2025 vehicle growth in the 20-30% range, ahead of the 15% that was expected (although Musk is notorious for overpromising). Meanwhile, profit margins, which had dwindled in recent quarters, improved thanks to $739 million in environmental regulatory credits. It doesn’t sound like all that much, but after three straight underwhelming quarters, it was enough minor victories to send shares soaring, at least temporarily. Piper Sandler raised its 2025 price target to 315, 30% higher than the current price. BUY

Unilever (UL), originally recommended by Carl Delfeld in Cabot Explorer, keeps holding in the 61-62 range despite coming off a strong quarter. In his latest update, Carl wrote, “Unilever (UL) shares were largely unchanged this week as this consumer goods company behind Ben & Jerry’s ice cream and Dove soap reported a bigger-than-expected rise in sales growth. The stock has a 3% dividend, delivers a 32% return on equity and an 8% return on assets. This high-quality European multinational sells consumer products with a strong position in emerging markets.” BUY

UnitedHealth Group Inc (UNH), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is down more than 7% in the last few weeks and has gone nowhere since mid-July. Coming off an underwhelming earnings report in which full-year 2024 and 2025 guidance fell short of expectations, there’s no obvious light at the end of the tunnel. So I say it’s time to sell this mega-cap health insurance stock while we still have at least a small profit. MOVE FROM BUY TO SELL

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 November 11, 2024.

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