Cabot Stock of the Week Issue: October 21, 2024

Stocks stayed the course this past week, holding near all-time highs despite myriad existential threats out there (expanding Middle East war, a toss-up presidential election two weeks away, Q3 earnings season underway, etc.). Clearly, the bulls are in control right now. That can change at the drop of a hat – or an unexpected news event. But we have to go with the evidence in front of us rather than try and predict or sell prematurely simply because the market is technically overvalued.

But it does make sense to add some better values to the portfolio. And this week we do just that, adding a small-cap utility stock that trades at a mere 0.63x sales. It recently caught the eye of Clif Droke, Chief Analyst of the Cabot Turnaround Letter. And today, it joins the Stock of the Week portfolio.

Here it is, with the latest from Clif.

Centuri Holdings, Inc. (CTRI)

It’s no secret that defensive-oriented utility stocks have been one of this year’s strongest performing groups, driven in part by hedging demand on the part of investors as the risk of a broad market correction increases with booming equity prices. But defensive considerations aside, another key reason for the sector’s strength is the enormous investment that will be required for the alternative energy and emerging technology buildout.

Consider just one aspect of this trend, namely the artificial intelligence boom. Indeed, the amount of electricity required to run generative AI applications, while difficult to fully quantify, is expected to constitute a significant portion of the world’s energy generation in the coming years. By one estimate, the energy consumption of AI and cloud computing alone could account for up to 8% of global electricity use if current trends continue.

To give just one example of how much electricity is required to support generative AI, a recent Carnegie Mellon study found that generating a single image using a powerful AI model takes as much energy as fully charging your smartphone(!). This certainly provides a greater perspective for the relentless strength in utility, nuclear and alternate energy stocks.

While utilities, in the aggregate, currently fall more under the category of momentum stocks than turnarounds, that’s not to say there aren’t turnaround opportunities within this group. In fact, one very conspicuous instance of this, as I see it, can be found in a largely overlooked player in the broader utilities space, namely Centuri Holdings (CTRI).

Centuri’s main focus is as a strategic infrastructure services 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.

More specifically, its offerings include gas utility services, including maintenance, repair, installation and replacement services for natural gas local distribution utility companies, with a focus on the modernization of infrastructure. The Phoenix-based company also provides electric utility services that include design, maintenance and repair, upgrade and expansion services for transmission and distribution infrastructure. Among its customers are electric, gas and combination utility companies, as well as renewable energy and 5G datacom providers.

The current incarnation of Centuri was founded 10 years ago as a holding company for natural gas utility contractors NPL and NPL Canada, but it was initially established over a century ago with the founding of Riggs Distler, a construction and maintenance company that specializes in mechanical and electrical services for the energy and utility industries (and which is owned by Centuri).

With a market cap of $1.7 billion, Centuri first came public in April this year at around 23 a share, quickly rallying to a high of 28, but then encountering selling pressure before dropping all the way down to around 14 in August and finding support above that level.

Beyond this show of post-IPO buyer’s remorse, a big reason for the stock’s decline was investors’ perception that Centuri’s revenues weren’t living up to expectations. Despite having some of the lowest reliance on fixed-price contracts within the industry, Centuri saw revenue drop 17% year-on-year in Q2 while earnings missed estimates by 10%.

But in the wake of this setback, a number of signs have emerged that point to the company’s future prospects being decidedly more sanguine. Wall Street sees a massive 63% leap in earnings next year, with additional strong double-digit growth in each of the next few years as the massive-scale utilities buildout boom presumably gathers steam in support of electric grid modernization, EV and alternative energy structure, and of course, AI.

Of particular interest, hedge fund manager Carl Icahn has recently initiated a nearly 3 million-share stake in Centuri which, given Icahn’s history of picking winners, should bode well for the stock’s turnaround prospects.

In view of what I see as a favorable fundamental backdrop for Centuri, I’m placing this early-stage turnaround candidate on a Buy with an initial upside share price target of 24 – 28% higher than the current price. BUY

Current Recommendations

Changes Since Last Week:
Rocket Companies (RKT) Moves from Buy to Sell

One sell this week, as in a portfolio filled with stocks up double- and triple-digit percentages, Rocket Companies’ (RKT) 10% drop, in an admittedly short stint, made it stand out like a sore thumb. So, with the addition of Centuri Holdings (CTRI), that still leaves us with 28 stocks – about three too many. I’ll be looking to pare back more in the coming weeks.

In the meantime, so many of our holdings are acting well, led by AST SpaceMobile (ASTS) (+14% this past week), Netflix (NFLX) (+12%), Blackstone (BX) (+11.5%) and Intuitive Surgical (ISRG) (+6%), mostly on earnings beats. Plenty more pivotal earnings reports to come among our stocks this week. Here’s what’s happening with all of them.

Updates

Alibaba (BABA), originally recommended by Clif Droke in his Cabot Turnaround Letter, was down about 6.5% this week as the air has come out of the balloon in Chinese stocks after a major runup following historic stimulus measures by the Chinese government and central bank. And while BABA shares are down 14% since peaking above 117 two weeks ago, they’re still up 21% since the start of September. Given the swift nature of the rally in Chinese stocks, a pullback – even a sharp one – was to be expected. Now let’s see where shares of this e-commerce giant go from here. BUY

AST SpaceMobile (ASTS), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, is up nearly 14% in the last week on no news. The strength of the market in the last week surely helped. Plus, shares of this ASTS appear to have garnered consistent support every time they’ve bounced off the 22-23 area in recent months. Given all its recent volatility, let’s see where it goes from here. But overall, I think the upside in this potentially revolutionary company – which last month launched five BlueBird satellites into low-Earth orbit to try and create a space-based, straight-to-smartphone broadband internet service – is immense, even though it’s already doubled in short order since we added it to the portfolio. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, was up another 1% in the last week on no news. Aviva remains one of the most reliable stocks in our portfolio and 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 0.34x sales. The 6.8% dividend yield adds to our total return. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is up 11.5% in the last week after reporting very strong Q3 results on Thursday. Revenue improved 50% year over year, earnings per share were up 40%, and both numbers easily topped analyst estimates. Net inflows were $40.5 billion – a three-year high – while assets under management (AUM) jumped 12% year over year to $820.5 billion. The latter number was driven by a strong third quarter in the equity market, which is a big reason why Mike dubbed BX a “Bull Market Stock.” Blackstone has certainly lived up to that name: We added BX shares to the portfolio in August 2023, about 10 months into the new bull market, and it hasn’t disappointed, advancing 65% to reach new all-time highs above 170. With the bull market still very much intact, I’m keeping the stock at Buy. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, held firm this week on no major company-specific news. In his latest update, Tom wrote, “This AI powerhouse was kind of bouncing around and going nowhere since the announcement of a 10-for-1 stock split in June. But it has rallied back to a new high this month. The AI trade had cooled off last quarter but it might be getting hot again. Nvidia (NVDA), a stock whose direction AVGO usually mimics, has rallied over 14% in October. The rise in chip stocks ahead of earnings is an encouraging sign that AI earnings have not slowed down and could get a big boost after the third-quarter earnings reports.” BUY

Capital One Financial Group (COF), originally recommended by yours truly in the Growth/Income portfolio of my Cabot Value Investor advisory, took a breather after making big strides the previous couple weeks. The company will report earnings this Thursday, October 24. Expectations are fairly modest: 7.2% revenue growth but with a 15.7% dropoff in earnings per share. But the full-year EPS outlook is bright (3.4% growth) and it’s much better next year (+21.2%), which is likely at least partially factoring in a yet-to-be-finalized $35 billion acquisition of Discover Financial. If (when?) approved, it would make Capital One the largest credit card issuer in the U.S. In Cabot Value Investor, I’ve set a price target of 185, which is 18% higher than the current price. BUY

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, didn’t budge this week and there was no news. In his latest update, Mike wrote, “CAVA has definitely lost upside momentum since its huge earnings move in August—but as we’ve written of late, the action certainly hasn’t been bad, with shares making a modest higher high in September and again last week, albeit on tame volume. Interestingly, the few weeks of calmer, slightly higher trading has allowed the moving averages to start catching up (50-day near 118). To be fair, there has been some so-so performance among faster-growing restaurant peers (Wingstop and Sweetgreen are both having issues getting above prior highs), and Wingstop and Chipotle report their quarters in two weeks, which could have an impact on the sector as a whole. (Cava’s own report likely isn’t out until closer to Thanksgiving.) Still, the longer CAVA can hold up here, the greater the odds it aims to extend its gains. We’ll remain on Hold, but another few days of tight trading could present a better entry point.” Having issued a rare “Sell Half, Hold the Rest” rating a few weeks ago on the heels of CAVA doubling in just five months, we’ll maintain our Hold rating as well with the stock already at record highs. HOLD A HALF

Constellation Energy Corporation (CEG), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, held firm at 271 in the absence of much news. In his latest update, Tom wrote, “A few weeks ago, CEG had a huge one-day 22% move higher after it was announced that Microsoft (MSFT) made a deal with Constellation to buy electricity generated from a future reopening of the Three Mile Island nuclear plant in Pennsylvania. Constellation says it is the largest electricity purchase in history. The deal will add to its projected double-digit earnings growth in the years ahead. Also, the electricity demand growth and technology companies’ desire for carbon-free nuclear power are getting a lot of investor attention. Future increases in business from other big technology companies are now more likely.” BUY

Dick’s Sporting Goods (DKS), originally recommended by yours truly in my Cabot Value Investor advisory, is up about 3% in the last week despite a 3% pullback Monday morning. There was no obvious company-specific news driving the uptick or today’s pullback. So, we’ll stay the course on this undervalued, steady-growth sports apparel retailer that trades at just 14x forward earnings estimates. It has 18.5% upside to my 250 price target. BUY

DoorDash Inc. (DASH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is flat in the last week on no news. The company reports earnings on Wednesday, October 30. The stock had previously gotten a bump from Tesla’s Robotaxi event, which left investors feeling like Tesla was less of a threat to DoorDash’s delivery business than some feared headed into the event. BUY

Dutch Bros (BROS), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was up 1.5% on no news. The upstart drive-through coffee company reports earnings on November 6, which will be a window into how many stores it’s opened in the last three months (it had 912 at the end of Q2 and expects to add 165 locations this year). Also, as Carl noted, “The company recently started rolling out a digital ordering program and management expects it to be in all stores by the end of the year. It already has a robust membership rewards program, which accounts for 67% of sales.” BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was off about 2.5% but is still having a solid October. In his latest update, Tom wrote, “While this stud pharma stock recovered strongly from a dip in July and August, it is still stuck at the same price it was in June. But no stock goes straight up forever, and LLY has still returned more than 50% year to date. The prognosis is still excellent as its leading weight-loss and type 2 diabetes drugs are still just near the start of their global market penetration. The company has invested $20 billion in manufacturing capacity in the last four years to meet growing demand. Analysts currently forecast 73% annual earnings growth for Lilly for the next five years. Lilly reports earnings at the end of the month and could get a boost.” BUY

Flutter Entertainment (FLUT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was flat again this week despite JMP Securities raising its price target on the online sports betting stock from 255 to 287 – or 25% higher than the current price. In his latest update, Mike wrote, “FLUT had a normal pullback following a run before and right after its Investor Day, and we decided to average up a week ago given that action. Unfortunately, on the afternoon of the next day, reports came out that the U.K. may look to hike taxes on sports betting, which caused the stock to fall sharply late in the day … though it found support near its 50-day line and has bounced decently this week. At least one analyst came to the stock’s defense, saying fears and/or the impact of such a tax move is overblown (the top brass certainly wasn’t ignorant of the tax risk when announcing their long-term outlook a couple of weeks before), and we don’t think the underlying story has changed—though, admittedly, there’s a chance investor perception may stay down on fears other countries (or U.S. states) jump on the tax-hike bandwagon. We think we’ll get an answer within a couple of weeks—if we see a lot of follow-on selling in the stock, we’ll have to conclude the issue is going to be on big investors’ minds for a while, which could cause us to change our stance. For now, though, the evidence remains mostly positive, with last week looking like a shakeout to support. Thus, we’ll stay on Buy, though we’ll also stay flexible, willing to cut bait if the stock falls into the 210 area.” We will too. BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, was mostly flat this week and has been hovering in the 163-164 area for nearly two weeks. The company reports earnings on October 30, which could finally give it a nudge. Analysts anticipate 7% revenue growth and 38% EPS growth. We have a 26% gain in just five and a half months on shares of this website domain registration giant. BUY

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, got a 6% bump after reporting earnings last Thursday. Adjusted earnings per share of $1.84 handily beat estimates of $1.64 and grew 26% year over year. Sales improved 17%, also topping analyst estimates. 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 – even with the stock at new all-time highs already. BUY

iShares MSCI India Small-Cap ETF (SMIN), originally recommended by Carl Delfeld in his Cabot Explorer advisory, gave back some of its gains from the previous week, falling from 85 to 83. The SMIN is a $960 million fund that holds a basket of about 500 small-cap India stocks. It is nicely diversified with the top 10 stocks accounting for just 12% of assets. The lead sector is industrials at 25%, followed by finance at 15%, consumer goods at 14%, basic materials at 13% and healthcare at 10%. 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, was up 3% in its first week in our portfolio, on no news. The company will report third-quarter earnings on November 6. The company is a mid-cap marketing automation platform and data specialist whose solutions are used by large e-commerce platforms such as Shopify, BigCommerce and Magento. In its latest quarter, the company grew EPS by 50% and revenue by 35%. It’s on track to grow both numbers in the 30-35% range this year. KYVO came public a little over a year ago and is up a modest 17% since but has been trending well since the summer, running up from 29 to 37 – a new high. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, was up from 51 to 52 – a new all-time high. The share price appreciation is nice. But the monthly dividend payments are the main (no pun intended) draw of this business development company. Its 7.8% dividend yield makes this one of the steadiest, most reliable income generators in the market. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down about 1% as renewed AI fervor settled a bit. The company reports earnings next Wednesday, October 30, which could finally be the thing to break MSFT out of its three-month malaise since reaching new highs above 467 in early July. AI is still a major long-term tailwind for Microsoft, and the company just announced it will begin making its own autonomous artificial intelligence agents next month. AI agents can act as virtual workers capable of carrying out tasks without supervision. Being at the cutting edge of the AI revolution means MSFT belongs in any long-term growth portfolio – and is very buyable after a down few months, especially ahead of earnings. BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, got a major boost from earnings last Thursday, sending shares gapping up 12% to new highs above 770! The Q3 results further demonstrated Netflix’s accelerating dominance in the streaming video wars: 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. In the fourth quarter, the company is set to launch the second season of its smash-hit original series Squid Game. Right now, Netflix is firing on all cylinders. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, gave back about half its gains from the previous week but remains above support at 115. A new study found that the pill form of Ozempic, the Danish drugmaker’s smash-hit weight-loss drug, cuts the risk of heart attacks and strokes by 14%. That discovery hasn’t moved the needle for the share price much yet. Perhaps the November 6 earnings report will help reawaken shares. With a 75% gain, we can afford to wait and see. But I’d still hold off on new buys given recent weakness. HOLD

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, was down from 49 to 48 as the stock continues to give back some of its September gains. In his latest update, Mike wrote, “ONON continues to futz around the 50 level, sneaking below its 25-day line in recent days but not really seeing any damaging action; so far, it looks like a normal rest after a solid August/September post-earnings run. The firm has been all quiet on the news and conference front since early September, so there’s been no hints as to how Nike’s continued struggles may be playing into its favor, as seems likely. Of course, we’re not complacent here—a drop into the 45 or 46 area could be iffy—but overall, the stock’s post-breakout run (from 43 to 52, ballpark) was solid, and this recent weakness is acceptable. Hold on if you own some, and if not, we’re OK taking a position here.” Ditto. BUY

Rocket Companies (RKT), originally recommended by Mike Cintolo in his Cabot Top Ten Trader newsletter, just isn’t getting the job done, and it’s time to say goodbye. While owning shares of a top mortgage lender at a time when the Fed has initiated what looks to be a very aggressive rate-cutting program, the stock simply has not responded in the six weeks since we added to the portfolio. And in a crowded portfolio with very few laggards, I can’t rationalize keeping it around, even with earnings just a couple weeks away. MOVE FROM BUY TO SELL

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, pulled back about 2.5% after a big run in the last month-plus. There was no news. As Carl wrote in his latest update, “Sea is focused on the Southeast Asia region, where young consumers are a big driver of economic performance. That’s a significant tailwind for the company’s consumer-centric businesses in e-commerce, digital entertainment, and digital financial services. Sea Limited revenue surged at least 20% in all three of its segments in its latest quarter.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, held mostly firm after falling more than 8% following its much-hyped but ultimately underwhelming Robotaxi event from the previous week. Now, the focus shifts to this Wednesday’s (October 23) massively important earnings report. Analysts are expecting 14.9% sales growth but a 12% decline in earnings per share. The EV giant has reported three straight underwhelming quarters. Let’s see if this one can surprise in the other direction. Keeping at Buy, but I’d keep new buys small until after the earnings report. BUY

Unilever (UL), originally recommended by Carl Delfeld in Cabot Explorer, dipped slightly from 63 to 62 on no major news. Unilever is a dominant consumer goods giant with a trove of 400 recognizable brands in its diversified portfolio – from Vaseline to Dove – that it sells in over 190 countries. Sixty percent of its sales come from emerging markets, which have higher consumer sales potential due to their growth. That makes this stock a bet on the return to health of the global economy. BUY

UnitedHealth Group Inc (UNH), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, nose-dived after earnings last Tuesday, but has since stabilized. EPS improved 9% year over year and easily topped estimates. Revenue also improved 9% and edged out estimates. So…why the selloff? Its full-year guidance disappointed, with profits trailing last year’s pace, citing higher medical expenses and stricter federal reimbursement levels for the shortfall. Investors seem to be acknowledging their overreaction by driving the share price back up from 556 to 574 in the last few trading days. But UNH is still down 5% in the last week. Considering the stock was at all-time highs prior to the report, that’s not a disastrous pullback. BUY

Veralto (VLTO), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was unchanged ahead of earnings this Wednesday, October 23. Analysts are estimating 3.9% sales growth and 13.3% EPS growth. The company has beaten estimates in each of the last four quarters. That offers hope that Wednesday’s report could finally get this stuck-in-the-mud stock to finally budge. 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 October 28, 2024.

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