Cabot Stock of the Week Issue: October 7, 2024

The market doesn’t like uncertainty or chaos. And right now, there’s plenty of both.

We are less than a month from a presidential election and the winner remains uncertain amidst one of the tightest races – at least according to the polls – in recent memory. Meanwhile, war in the Middle East has escalated and spread to Lebanon and Iran, all within the last couple weeks. A massive hurricane just leveled a wide swath of the southeastern U.S., leaving more than 200 dead and hundreds more still missing – with another Category 5 hurricane set to make landfall in Florida later this week. And this week, third-quarter earnings season gets underway.

That’s a lot for investors to worry about, and it comes during the traditional “spooky season” – October, the month in which the market has bottomed in each of the last four years.

And yet, stocks are coming off a surprisingly strong September, thanks primarily to the Fed, whose 50-basis point rate cut helped send both the S&P 500 and the Dow (but, notably, not the Nasdaq) to new all-time highs by month’s end. So it’s hard to read too much into a mildly sluggish start to October. Still, things feel very unsettled in the world right now, and there are plenty of macro headwinds that could derail the momentum stemming from the elation that followed (and preceded) the Fed’s decision to cut rates for the first time in four and a half years. It’s why volatility, as measured by the VIX, has spiked to its highest level in a month.

All of that uncertainty means it’s a good time to add a lower-risk play to the Cabot Stock of the Week portfolio. So today we add a large-cap European multinational that pays a hefty dividend and boasts a microscopic (0.22) beta. It’s been a staple of Carl Delfeld’s Cabot Explorer portfolio this year, and now is a good time to add it to ours.

Here are Carl’s thoughts.

Unilever PLC (UL)

European stocks are cheaper than U.S. equities but overall have produced lower revenue and profit growth largely due to tech being a smaller proportion of the market. The stocks in the Stoxx Europe 600 are priced at about 15 times earnings, while the S&P 500 index is trading at roughly 27 times earnings.

This is the biggest gap in two decades. There is plenty of room to catch up as since 2000, U.S. markets have posted a 256% increase while the Stoxx Europe 600 has only risen by 42%.

European multinationals also provide investors with more international exposure since about 60% of European companies’ sales occur outside Europe, versus 30% for S&P 500 American companies, according to a study by Wellington Management.

High-quality European multinationals are a good place to start as they are widely recognized as being well run and have tentacles spread throughout the world. Many of them make as much money in America as Europe, underlining the key truth that where a company operates and makes money is much more important than where it bases its headquarters.

Some of these European multinational stocks either trade on the NYSE or Nasdaq but many trade over the counter in a category I refer to as “Pink Sheet Blue Chips.”

These European stocks can be largely divided into several groups.

The first group is the pharmaceutical giants like Novo Nordisk (NVO), Roche (RHHBY), Novartis (NVS), and GSK (GSK), all of which benefit from a healthcare spending boom to post impressive profits.

Another is the luxury goods brands such as LVMH (LVMUY) and L’Oreal (LRLCY). China has been the key driver to both companies, so this story is already starting to sputter as Chinese luxury spending is slowing down along with its overall economy. However, luxury spending is resilient globally and any pullback in these stocks is an opportunity to take a stake in a high-margin persistent market.

Then there are the well-known consumer stocks such as Nestle (NSRGY) and Unilever (UL). These are conservative ways to tap into global consumer markets and earn some steady dividend income. These stocks tend to be less volatile but have a decided upward trend in stock price over time.

Next are tech companies such as ASML Holding (ASML), the strategically important semiconductor chip equipment business from Holland, and software company SAP SE (SAP) from Germany.

Which European multinational is the best stock pick today?

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.

However, 30 “power brands” account for almost 75% of Unilever’s total sales.

It is a steady, stable stock for an uncertain environment, and for a change, its stock is selling at a rare discount – down about 25% from all-time highs and at just over two times sales.

It also offers a nice dividend yield supported by a robust free cash flow.

Two other reasons I like Unilever are that 78% of its sales are outside North America and almost 60% are from emerging markets that offer higher consumer sales potential due to better demographics.

This is a stock to tuck away for the long term and for your buy list whenever the market pulls back sharply. BUY

Current Recommendations

Changes Since Last Week:
Novo Nordisk (NVO) Moves from Buy to Hold
Ollie’s Bargain Outlet (OLLI) Moves from Buy to Sell

We say goodbye to Ollie’s Bargain Outlet (OLLI), which simply hadn’t performed. Novo Nordisk (NVO) also gets downgraded to Hold until the stock rights the ship, which we think it will. All the rest of our stocks are acting well, which is why we still have 27 of them – two more than we’d prefer – with the addition of Unilever (UL). I plan to keep trimming in the coming weeks, but hopefully the market – and our portfolio – will make that an arduous task.

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

Updates

Alibaba (BABA), originally recommended by Clif Droke in his Cabot Turnaround Letter, kept on rising, tacking on another 6.5% after exploding 24% higher the week before. While there’s been no company-specific news of late, all Chinese stocks are getting a major boost from the sweeping stimulus measures implemented by China’s central bank and government to help fix their long-ailing economy. So far, the measures are working, at least with investors, and BABA has been on a tear, advancing to its highest share price since early 2023. In the pre-Covid days, this was once one of the hottest stocks on the market. If China’s economy improves, BABA could be one of the best ways to play the resurgence. BUY

AST SpaceMobile (ASTS), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, closed out last week in style, popping more than 12% on Friday on no major news. Still, even with that big move, shares of the space-related company were unchanged in the last week (including a 4% drawdown Monday morning), as there haven’t been any material updates since AST launched its first five BlueBird satellites into low-Earth orbit in the first half of September. Eventually, those satellites will provide broadband internet straight to smartphones, and this pre-revenue company may start to generate some serious business. But for now, the initial fervor over this potentially revolutionary company has subsided, and results may be the thing to push it into the next phase of its rally. So we may have to be patient for a bit. I think it’ll be worth the wait. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, is down about 3% 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 0.33x 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, was off about 3% and has pulled back since the highs of the post-Fed rate cut. The market’s sluggishness of late has been the main thing dragging it down, as this “Bull Market Stock” (Mike’s term) tends to outperform in bull markets – but fall even further when the market pulls back. Earnings are due out October 17, which could help turn the tide. Regardless, we are still very much in a bull market, so BX will likely remain in our portfolio until the bull market fizzles. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was up another 4% this week and is threatening to match its June highs above 182! In his latest update, Tom wrote, “This AI powerhouse continues to bounce around since its stellar earnings report and announcement of a 10-for-1 stock split in June. AVGO was upgraded earlier last month, and the other one-half position was added back after the stock took a beating in the beginning of September. The AI trade has lost a lot of its luster recently. The eventual slowdown was inevitable. But AI is still a huge catalyst, and the market phenomenon is far from over. Broadcom is one of the best positioned companies and the stock can easily make up for lost time when it gets hot again.” That appears to be happening now. BUY

Capital One Financial Group (COF), originally recommended by yours truly in the Growth/Income portfolio of my Cabot Value Investor advisory, had a solid first week on our portfolio, up 2.5%. There was no news. But two big potential catalysts loom: first, the October 24 earnings report; second, and more importantly, the pending acquisition of fellow credit card giant Discover Financial (DFS) for $35 billion, a deal that could be completed either later this year or early next year. Warren Buffett added COF stock to his Berkshire Hathaway portfolio in May 2023, and shares remain undervalued, trading at less than 11x forward earnings estimates. Given the potentially transformative nature of the Discover deal, it may be even more undervalued than that. In Cabot Value Investor, I have assigned the stock a price target of 185 – 22% higher than the current price. It could get there quickly, especially once the Discover Financial deal gets approved. BUY

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, was up 2.5% this week and is right back near all-time highs. In his latest update, Mike wrote, “CAVA impressively marched to marginal new closing highs two weeks ago, shrugging off the huge post-earnings rally that was followed by selling from insiders and of closely-held shares. While the stock has come back down a bit, volume’s been light and shares are hanging around its 25-day line. (There was a bearish write-up from a short seller about the cleanliness of the firm’s locations, but that really never caused much movement.) Now, we do think the stock can rest a while longer, and if the market suffers further geopolitical indigestion, a sharper downmove is possible. But so far we’re encouraged, with the stock correcting through time rather than price as the moving averages (50-day line near 108) catch up. We’ll continue to stay on Hold, but the longer CAVA stays up here, the greater the odds it has another run.” We sold half a couple weeks ago when it had already achieved a double for us in a matter of months and advised holding the rest. We’ll keep it at Hold a Half. HOLD A HALF

Constellation Energy Corporation (CEG), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, just keeps hitting new all-time highs, advancing another 9% this week. It’s all due to one major catalyst, as Tom writes, “Two 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. The stock has not pulled back since. Details of the agreement are yet to be released but management at Constellation says it is the largest electricity purchase in history.

“The deal should add to Constellation’s already projected double-digit earnings growth over the next several years. It also confirms the fact that technology companies, which are responsible for the surge in electricity demand, are targeting carbon-free nuclear power. Future increases in business from other big technology companies are now quite likely.” We now have a 58% gain on CEG in just over a month. If you bought early after our September 4 recommendation, I suggest trimming a few shares to book profits now, with the stock at record highs. Officially, however, we’ll stay on buy. BUY

Dick’s Sporting Goods (DKS), originally recommended by yours truly in my Cabot Value Investor advisory, has been in retreat mode in recent weeks, falling from 237 to close out August all the way to 202 now. There’s been no real reason for the dropoff, and the company is coming off a strong second quarter in which adjusted earnings per share improved 55% year over year and net sales rose 7.8%, both higher than analyst estimates. Those results initially gave DKS shares a big boost, but one that has completely evaporated since. With no reason for the selling, and with shares trading at less than 15x forward earnings estimates and 1.34x sales, this looks like a good entry point in one of the most reliably growing retailers in the U.S. BUY

DoorDash Inc. (DASH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, added another couple points – up from 141 to 143, a new 52-week high. In his latest update, Mike wrote, “DASH remains in good shape, stretching above resistance and holding most of its gains during the recent market volatility. We love the growth profile here in both sales and EBITDA and think the increasing move into non-restaurant deliveries (grocery, drug, convenience and even liquor stores) will boost growth and keep margins moving up.” BUY

Dutch Bros (BROS), originally recommended by Carl Delfeld in his Cabot Explorer advisory, dipped from 32 to 31 on no news. The drive-through coffee store chain opened 36 new shops in the second quarter, driving revenue up 30% year over year. It has a lot of potential for growth, ending the most recent quarter with 912 locations in just 18 states. The stock is trading about 10% below its 2021 initial public offering (IPO) price despite doubling its store count and tripling its sales since 2020. We still like the upside, but BROS needs to start proving itself soon before we lose patience with it. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, had a nice bounce-back week, rising more than 3%. There was some good news, as the company’s two signature weight-loss/diabetes drugs – Mounjaro and Zepbound – are no longer on the supply shortage list, according to the Food and Drug Administration (FDA). That means all systems are go for its biggest cash cows (and share price catalysts) of the last couple years. Put in perspective, the stock is up more than 50% year to date and 170% since we added it to the Stock of the Week portfolio in early 2023. I think the run is far from over: Mounjaro and Zepbound are just scratching the surface in terms of global penetration, and 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. BUY

Flutter Entertainment (FLUT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up slightly on no major news. Being in the heart of football season surely helps this leading online sports betting stock from both a revenue and perception standpoint. In his latest update, Mike wrote, “We have high hopes for Flutter, which runs FanDuel and other betting sites (like BetFair), as its international operations are growing at a decent clip and are very profitable, while the U.S. business is roaring ahead, even in places where it’s been up and running for more than a few years. At last week’s Investor Day, the top brass laid out a very bullish update and outlook, saying it believes the U.S. market in 2030 will be $70 billion, 50% larger than its estimate from just two years ago and miles larger than it stands today. Other enticing stats: Cost per impression for its U.S. marketing spend is down a whopping 45% from 2022, a great sign the Wild West days of market share grab in the sector are in the past; it has an industry-leading payback on new customer acquisitions; of its largest 20% of clients, 91% have stuck around, with the number of bets by them increasing 11% year-on-year; U.S. gaming market share has moved up seven percentage points since 2021 despite numerous competitive launches; and all customer cohorts by year (those that came in during 2020, 2021, etc.) are still growing their revenues to Flutter by double digits this year. All told, the firm sees revenues (including overseas) lifting 14% annually through 2027 while free cash flow compounds at a 36% rate and the firm returns well over $1 billion per year (likely via buybacks) during that time. Fundamentally, then, the story looks great—and the stock did pop nicely on the news—but it’s since sagged back to where it was before the Investor Day. We held off averaging up last week and are glad we did, though FLUT still is above all moving averages (25-day line nearing 212) so we remain optimistic another upmove is in front of us. Long story short, we’re holding our half-sized stake but are waiting to buy more until we see follow-on strength. If you’re not yet in, we’re OK grabbing shares on this dip.” BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, held firm at 156. It seems this high-flying stock is finally hitting the pause button the last three weeks after major gains in the first eight months of the year (it’s up more than 47% year to date). Its new Airo AI solution, unveiled last November, has been a total game-changer for this website domain registry firm. We’ll see if shares have another big upmove in them. BUY

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was down more than 2.5% this past week to sink to its lowest point in a month. There’s been no news for the maker of da Vinci robotic surgical systems, used in hospitals across the country. Earnings are due out in a couple weeks, so perhaps a good quarter can stop the relative bleeding. But it’s worth keeping a close eye on this one. BUY

iShares MSCI India Small-Cap ETF (SMIN) was down 4% this week, dipping to its lowest point since mid-August. 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 great, high-growth way to gain exposure to the fastest-growing major economy in the world. BUY

Main Street Capital Corp. (MAIN), originally recommended by Tom Hutchinson in the High Yield Tier of his Cabot Dividend Investor advisory, added another point, up from 50 to 51 – its highest level since July. In his latest update, Tom wrote, “MAIN is back in business and creeping back toward the high end of its recent range as recession talk ebbs. It took a hit in early August from the temporary recession scare but it has recovered and been trending higher since. Solid earnings and reduced recession fears are leveling the stock. The BDC reiterated its monthly dividend of $0.245 per share for the rest of the year and announced an additional $0.30 per share supplemental dividend that was paid in September.” This monthly dividend-paying business development company remains a reliable source of income, even if the share price doesn’t change much. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down 4.5% this week but is still trading well above its September lows. After a banner 2023 in which MSFT shares were up more than 50%, 2024 has been a bit of a slog, with the stock up less than 10% and well off its early-July highs. Thanks to ChatGPT, Microsoft was one of the pioneers of the generative AI movement, lifting the share price to new heights. Now that AI fever has cooled considerably – and Microsoft is needing to spend big on data centers to support its AI operations (see Constellation Energy, above) – MSFT shares are a bit “meh.” But we’re talking about a stock that’s been growing for decades and has doubled in the last five years as the company continues to reinvent itself, and every version of it is as one of the clear leaders in the tech space. And it’s still at the forefront of the AI revolution, which isn’t going away. MSFT isn’t having a great year, but I still think it belongs in any long-term growth portfolio. BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, has been mostly holding its gains above 700 after touching new all-time highs in late September. Analysts are fairly mixed on the stock ahead of earnings on October 17, with one major firm upgrading its rating while another downgraded. From a high level, however, the company is as dominant as it’s ever been, adding 39 million subscribers in the last year (through June), cracking down on password sharing, introducing a new ad-supported tier, and churning out hit after hit, the latest being the new season of “Love is Blind,” in addition to popular new original show “Nobody Wants This” (a rom-com type starring the ever-present Kristen Bell and Adam Brody of “The O.C.” fame). Like Microsoft and Tesla, Netflix is essentially “on scholarship” in the Stock of the Week portfolio, meaning it’s not going anywhere anytime soon. With its stranglehold on the streaming space tightening, it should be part of any long-term portfolio. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, was flat this past week, thanks in part to a strong first few hours of trading today. The stock dipped to 115 last Friday, its lowest point since February, as its weight-loss drugs (Ozempic and Wegovy) take some heat from Congress over how expensive they are in the U.S. ($968 for a month’s supply of Ozempic) compared to overseas (just $59 in Germany). The sharp drop in shares of late, combined with the potential for much lower prices (and margins) in the U.S., where this Danish drugmaker derives 72% of its revenue, spooked Carl into selling last week. I haven’t lost faith in this GLP-1 co-leader (along with Eli Lilly), so let’s simply downgrade shares to hold until they can get their act together. MOVE FROM BUY TO HOLD

Ollie’s Bargain Outlet (OLLI), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, simply isn’t getting the job done, and it’s time to say goodbye to this bargain retailer. Despite some fits and starts, shares are off about 6% since we added the stock to the portfolio in early July. In an overcrowded portfolio, that type of underperformance just isn’t worth it. MOVE FROM BUY TO SELL

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, held firm at 50, right in the middle of its recent 49 to 51 range. In his latest update, Mike wrote, “ONON has pulled back on light volume to its 25-day line in recent days; giant peer Nike (NKE) released another dud of a quarterly report (sales down 10%, earnings down 26%), which dented that stock and pulled down the entire group yesterday. Still, it’s possible/likely some of that lost business is flowing On’s way as the firm’s footwear for running, tennis and other sports, as well as its apparel and accessories business, is gaining in popularity and taking share. The market’s near-term movements will obviously have an impact, especially as ONON regularly is subject to some wiggles, but we think the dip is providing a solid entry point.” BUY

Rocket Companies (RKT), originally recommended by Mike Cintolo in his Cabot Top Ten Trader newsletter, was down about 10% this week to reach new post-Fed rate cut lows in the 17.5 range. In fact, this is the lowest shares have been since early August. We added shares of RKT on the premise that the mortgage lender would get an immediate boost from falling rates. That hasn’t happened yet. But we’re only a few weeks in. I’m willing to give this one a long leash, and it’s not worth tossing to the side after one bad week on no news. BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, added another point, up from 94 to 95 after touching new 52-week highs above 97 late last week. All three of the Singapore-based company’s major business segments (Shopee, Garena and SeaMoney) grew by more than 20% in the latest quarter. Shopee, its leading e-commerce wing, has a 48% market share in Southeast Asia, making it easily the most dominant player in that fast-growing region. This remains one of our highest-conviction buys in the portfolio, as even after more than doubling this year, shares trade at a fraction of their 2021 highs. It’s a great catch-all way to play Southeast Asian growth. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, finally hit a speed bump after a major run in the last couple months, falling more than 4% this week. Perhaps the stock can reclaim momentum at its Robotaxi Day this Thursday, when Elon Musk unveils a driverless robotaxi in Hollywood. We’ll see if that much-hyped event surprises or disappoints. Regardless, the bigger date will likely come on October 23, when the company releases its third-quarter earnings. Unlike in the second quarter, its Q3 delivery numbers – out last Wednesday – came in a hair shy of estimates. The company delivered 462,890 cars in Q3, about 400 shy of the 463,310 expected. That kind of shortfall isn’t the end of the world, and it was up from 435,059 in the third quarter last year. But it does call this month’s full earnings report into question after three consecutive disappointing quarters. For now, however, the stock is acting well, with a very normal-looking pullback after a big run. We’ll see how it responds to Robotaxi Day. BUY

UnitedHealth Group Inc (UNH), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was mostly unchanged ahead of next Tuesday’s (October 15) earnings report. It’s a nice defensive, dividend-paying stock to have in the portfolio, but it’s also having a solid year, and we have a 15% gain since adding the mega-cap health insurer to the portfolio back in May. BUY

Veralto (VLTO), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, hasn’t budged much since we added it to the portfolio three weeks ago. It’s a water quality (60% of revenue) and product quality/innovation/printing (40% of revenue) company that was spun out of the large life sciences company, Danaher (DHR), a year ago. With 3% revenue growth and 7.8% EPS forecasted this year, it’s a solid growth story. BUY

If you have any questions, don’t hesitate to email me at chris@cabotwealth.com.

Here, too, is the latest episode of Cabot Street Check, the weekly podcast I host with my colleague Brad Simmerman. This week we welcomed on China investing expert Larry Cheung for a deep dive on China’s sweeping stimulus measures and subsequent rush into Chinese stocks. It’s worth a listen, especially if you’re wondering about the staying power of this Chinese stock rally.

The next Cabot Stock of the Week issue will be published on October 14, 2024.

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