Cabot Stock of the Week Issue: September 16, 2024

Is the September selling already over? That’s probably up to the Fed.

After maintaining the federal funds rate at two-decade highs of 5.25%-5.5% for more than a year, Jerome Powell and company are finally, mercifully, set to start slashing rates this Wednesday, September 18. The question is: by how much? I have maintained they’ll “only” cut by 25 basis points (0.25%) this week, although Wall Street disagrees: 59% of traders think the Fed will cut by 50 basis points (0.50%) on Wednesday, according to the trusty FedWatch Tool. So, if I’m right, it’s possible investors will be disappointed, at least temporarily, and that shares will get sold off for a few days on claims that the Fed is being too conservative.

We’ll see what happens. That’s all hypothetical. I prefer to deal with the actual. And in actuality, stocks bounced back last week to regain nearly all of their losses from the first week of September. As I wrote previously, the last four second-half bottoms have come in October, so another pullback – especially if the Fed “disappoints” – wouldn’t surprise me at all. But right now, stocks are pretty much where they were entering September: in a bull market, and trading near all-time highs.

So today, we take a relatively big swing in an early-stage water company. It was the Top Pick of Tyler Laundon in his August issue of Cabot Early Opportunities. While not a household name at all, it is a large-cap stock that has done more than $5 billion in sales in the last year. And I like the upside.

Here it is, with Tyler’s latest thoughts.

Veralto Corp. (VLTO)

Veralto (VLTO) is a pure-play water and product quality company that came public last September when it was spun out of Danaher (DHR), a large life sciences company.

The company says it plays a major role in preserving the planet by selling goods and services to customers that ensure clean water, safe foods and trust in essential goods.

It does this through two business segments.

Water Quality (60% of 2023 revenue) has a portfolio of water analytics and treatment solutions (testing and treatment equipment, software platforms, hardware, monitoring, etc.) that reliably deliver safe drinking water for public and private utilities.

The company’s water products treat and/or recycle over 12 trillion gallons of water each year and reach roughly 40% of the world’s population.

The Product Quality and Innovation segment (40% of revenue) is focused on industrial printers, color measurement, color standards and software and hardware for packaged goods processes.

Roughly 80% of the top global consumer packaged goods and pharma brands use Veralto’s product quality and innovation solutions.

Management says that around 80% of sales come from water, food and pharma companies. Nearly 60% of sales are recurring, in the form of consumables, software and services or some variation of the razor/razor blade model.

I find the company intriguing for a couple of big-picture reasons.

First, water quality is something just about everybody in the world sees as a priority. As water sources become challenged it’s increasingly important to use technology that can tell if the water being delivered to end consumers or in manufacturing processes is acceptable or not, and what needs to be done to make it “good,” then treat it accordingly.

Second, the world of product packaging is just insane, both in terms of how important it is from a consumer attention-grabbing perspective as well as a recycling perspective.

Both of these are relatively stable businesses with stable cash flow and high margins.

In Q2, the company beat expectations. For full-year 2024, current consensus is calling for 3% revenue growth (to $5.17 billion), accelerating to 5% in 2025, with EPS growth of 7.5% (to $3.43) this year picking up to 8% in 2025.

Keep in mind that current-year comparisons are relative to Veralto when it was part of Danaher last year. Now that the spin-off is complete, the company is free to operate without all the distractions that come from being part of a much larger enterprise, including pursuing accretive M&A.

As for the stock, VLTO was spun out last September and closed near 80 the first day. Shares sold off in the weeks afterward, but after reporting earnings in early February, when the stock was trading near 75, VLTO has put up a compelling chart pattern. Shares have tended to climb steadily for a few months, pause and/or give a little back, then move higher again. The last drawdown was in late June and early July and pulled VLTO down from 102.6 to 93.8. Shares were back to 100 a few weeks later for the Q2 earnings report on July 25 and have moved to 110 since. BUY

Current Recommendations

Changes Since Last Week:
Viking Holdings (VIK) Moves from Buy to Sell

One more sell this week, as luxury river cruise specialist Viking Holdings (VIK) gets thrown overboard (sorry, couldn’t resist). I like the story (fast-growing niche travel company at a time when travel is back to pre-pandemic levels), but the stock simply isn’t performing. In a portfolio chockfull of stocks that are performing – four of our recommendations have at least doubled; 14 others are up double-digit percentages – there’s no room for laggards like VIK. It’s a good problem to have. And with 26 stocks in the portfolio, we’ll likely need to cut one or two more in the coming weeks to get back under our preferred 25-stock cap. The Fed could either make that decision easy – or much harder.

But before we embark on a brave new rate-cutting world, here’s what’s happening with all our stocks.

Updates

Alibaba (BABA), originally recommended by Clif Droke in his Cabot Turnaround Letter, was up from 81 to 84 this week, despite the sector tailwind of President Biden cracking down on fellow Chinese online retailers Temu (owned by PDD) and Shein for certain U.S. trade loopholes. Alibaba was not mentioned by name, but BABA shares did get a bit of blowback on the news. I doubt it will impact shares much, and in fact, it didn’t this week. Alibaba is essentially the Amazon of China, and it remains an undervalued former market darling with immense turnaround potential. BUY

AST SpaceMobile (ASTS), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, has taken off yet again, with shares up nearly 8% in the last week after the company successfully launched its first five BlueBird satellites on time last Thursday. Here’s what Tyler had to say about it: “As you know if you’re following this story, the company is working to create the first and only space-based cellular broadband network accessible directly from your average cellphone.

“This first launch is a MASSIVE step in the right direction.

“Yes, we now move on to more investment and more satellite launches, etc. But this is a milestone for sure.”

ASTS shares were down initially in the hours after the September 12 launch but have since bounced back. Bottom line: The first major catalyst for this potentially revolutionary company went off without a hitch. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, bounced back nicely after briefly dipping below 13 a share. There was 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 6.6% dividend yield adds to our total return. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has burst to new all-time highs above 152! The 9% bump this past week coincided with the market’s swift rebound; as usual, BX shares outperformed, reinforcing their reputation as a “Bull Market Stock” (Mike’s term). Weeks like this past one are why we keep Blackstone in the portfolio; it will likely remain there until the bull market fizzles. Additionally, Blackstone and Vista Equity Partners are in talks to buy Smartsheet (SMAR), a mid-cap company specializing in workplace collaboration software (we use it at Cabot). That’s likely adding a bit more zest to the BX rally at the moment. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, is back with a vengeance, rising to 164 after dipping as low as 137 just 10 days ago. It seems Wall Street quickly realized the folly of its post-earnings selloff two weeks ago following a perfectly fine earnings report. As Tom noted in his latest update, “Earnings beat expectations but the market was disappointed with next quarter’s guidance. The AI part of the business is booming beyond previous expectations and the VMware acquisition continues to benefit the company. But the performance of the other business segments is lackluster.

“The AI story is still alive and well. But the market of last week was itching to punish AI stocks that have been thriving. It was a very bad time for a hiccup. … The company still grew EPS 18% and revenue 47% over last year’s quarter. The fledgling parts of business are cyclical and at a low point in the cycle and should come back when it changes. The story remains the same as it was when AVGO was soaring and now the stock is a lot cheaper.”

Indeed, despite the big rebound week, AVGO shares remain well below their June peak near 183. We downgraded to Hold on weakness a couple weeks back. Let’s wait to see if it can stabilize for more than a week before restoring a Buy rating, but this was a very encouraging step. HOLD

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, continues its recovery, jumping from 118 to 121 this week after dipping as low as 110 in late August. In his latest update, Mike wrote, “Cava Group (CAVA) remains in fine shape, actually testing new price and relative performance peaks today, though to be fair, we’d note the move up in recent days has been on low volume. One thing that stands out from the firm’s earnings presentation was that, while same-store sales bounce around, the two-year stack (total same-store sales change over two years) has been accelerating of late, from a still-strong low of 23.3% in Q3 last year to 32.6% in the just-reported Q2. Looking ahead, the company is testing out and is aiming to launch in October a revamped rewards program that it says is boosting awareness from both low- and high-frequency customers, which should be a help as the nationwide expansion continues. Back to the stock, we like the action, and while we won’t argue with a small nibble here, we’re going to stay on Hold, seeing if a higher-odds setup appears as the market continues to gyrate.” Let’s do the same. HOLD

Constellation Energy Corporation (CEG), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, had a very good week, advancing more than 11% to recapture virtually all its losses from the previous week. Constellation is a nuclear power provider that, Tom notes, “is also related to technology, as it should be a primary beneficiary of increased electricity demand from AI.” That gives Constellation more growth potential than the average utility, and utilities are already having a very good year, up more than 20%. CEG shares are performing even better, up 65% YTD. And yet, the stock trades well below its May highs. BUY

Dick’s Sporting Goods (DKS), originally recommended by yours truly in my Cabot Value Investor advisory, bounced back nicely this week, rising from 208 to 213 after dipping as low as 206. There was no news. The sports apparel retailer is coming off a good-not-great earnings report two weeks ago. First, the good: the $4.37 in earnings per share blew analysts’ Q2 estimates of $3.86 out of the water and marked a 55% improvement year over year, while sales ($3.47 billion) narrowly topped estimates ($3.44 billion). Same-store sales growth came in at 4.5%. All of it was enough for the retailer to raise full-year 2024 guidance to a range of $13.55 to $13.90 in EPS (up from $13.35 to $13.75 previously) and same-store sales growth to 2.5% to 3.5% (up from 2-3% previously). However, the midpoint EPS guidance number ($13.73) came in shy of analyst estimates ($13.84). Investors initially sold out of the stock but some have since come crawling back.

Dick’s is one of the most consistent growers in the retail space – even growing right through the pandemic as consumers pivoted from team sports to individual sports like running, hiking and biking – Dick’s has something for everyone. Now, with the pandemic in the rearview mirror and team sports back in full swing, sales have taken off, and yet the stock remains cheap at 16x forward earnings estimates at 1.35x sales. In Cabot Value Investor, I have a 250 price target on DKS, 17% higher than the current price. BUY

DoorDash Inc. (DASH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is at five-month highs above 130 after advancing 4% this week. There’s been no news. The food delivery giant is considering expanding from just restaurants into groceries, alcohol, beauty supplies and home improvement goods. The company is already growing fast (23% sales growth, 54% EBITDA growth in the latest quarter), but there could be avenues for even greater growth ahead, which is why we added it to the portfolio last month. BUY

Dutch Bros (BROS), originally recommended by Carl Delfeld in his Cabot Explorer advisory, finally broke out of its 30-to-32 range, advancing to 34 for the first time in more than a month. There’s been no news. Dutch Bros operates 912 drive-through coffee stores but is growing fast, expecting to add 165 new locations this year. In addition to coffee, it offers energy drinks, boba tea, milkshakes, and smoothies. A Cowen analyst recently reiterated a Buy rating on the stock, with a price target of 47. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, got back some of the 6% loss it suffered two weeks ago, rising 2% this week. The stock never stays down long, as it’s proven time and time again over the last two years. On the news front, Lilly is investing $1.8 billion in Ireland to expand its manufacturing operations, particularly for its weight-loss drugs and coming Alzheimer’s drug. It’s no doubt an effort to ward off any supply constraints after rival Novo Nordisk (see below) has experienced them in recent months. Being so in demand that you need to ramp up production is definitely a good problem to have. BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, ticked down another couple points after falling 6% the previous week. The stock had done nothing but rise for most of the past year since the company announced its Airo AI solution for website domain registrants, so a pullback is nothing to fret. GDDY has still doubled in the last year, and we have a sizable gain since adding shares in May. BUY

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was up more than 2% this week and is back flirting with the all-time high above 492. There was no news. The maker of the da Vinci robotic surgical systems recently introduced its new da Vinci 5 system, which is starting to ramp up sales: It sold 70 of them in Q2, up from a mere eight in Q1. That’s a good trend. BUY

iShares MSCI India Small-Cap ETF (SMIN), originally recommended by Carl Delfeld in Cabot Explorer, was up from 84 to 86 – a new record high! 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, is knocking on the door of 50 for the first time since early August. The monthly dividend payer goes ex-dividend this Friday, September 20. This BDC confirmed the monthly dividend of $0.245 per share for the rest of the year and announced an additional $0.30 per share supplemental dividend payable in September. This isn’t the sexiest holding in our portfolio, but it’s a reliable income generator that rewards you every month. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, has recovered from its late-August/early-September swoon and then some, advancing more than 6% this week to top 430 for the first time since July. Microsoft’s partnership with AI pioneer OpenAI continues to pay dividends, as this morning it was reported that Vodafone will buy 68,000 licenses from Microsoft to use its Copilot AI technology after trials found that the technology saves workers about three hours per week per person. New Copilot assistants target business efficiencies, saving companies time by offering faster programs like Microsoft Teams conferencing software, Word and Outlook. The Vodafone deal is the latest evidence of the demand for Microsoft’s cutting-edge AI capabilities and is one of many reasons MSFT belongs in any long-term portfolio despite the stock’s rather “blah” performance year to date. BUY

Neo Performance Materials (NOPMF), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was down slightly this week on no news. A new deal with China to sell its rare earths processing business for $30 million to China’s Shenghe initially revived the shares (they’ve fallen a bit since), though Carl noted in a recent update that Neo was “essentially forced” to sell the business to state-owned Shenghe. We’ll keep an eye on where it goes from here, but now, the sale has mostly acted as a tailwind. BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up about 2.5% this week and is back within striking distance of its August highs. JPMorgan maintained an “Overweight” rating on the streaming giant, with a price target of 750, applauding the effectiveness of the company’s crackdown on password sharing (thus forcing more people to subscribe) as well as its new advertising (i.e., lower cost) tier. Netflix has fended off myriad challengers in the streaming space (Apple TV+, Amazon Prime, Hulu, Peacock, Max, etc.) and is stronger than ever, with 14.8% revenue growth and a whopping 58.8% EPS growth forecast this year. Like MSFT, it’s a must for any long-term portfolio. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, was up 4% this week, recovering most of its losses from the previous week (sound familiar?). News that its in-development new weight-loss/diabetes drug Amycretin is a pill rather than an injection like Ozempic and Wegovy seemed to go over well on Wall Street, as it could be a game changer for both the company and the fledgling weight-loss drug sector. As Carl noted, “The phase 1 trials also show some mild and moderate side effects and greater weight loss in a shorter time frame. The obesity pill could prove stiff competition for Eli Lilly and a sign to investors that Novo Nordisk might have a pipeline of next-generation drugs. Demand for Novo’s products is still high with Ozempic sales up 30% to $4.26 billion in the last quarter while Wegovy sales were up 69%.” BUY

Ollie’s Bargain Outlet (OLLI), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, had a great week, up nearly 9% to fully recover every bit of its late-August/early-September losses. There was no news. It’s possible investors have come around on the recent earnings report, which was so bad that it necessitated the kind of selling that ensued. Net sales improved 12.4% while comparable-store sales jumped 5.8% year over year – but Wall Street didn’t love the relatively modest earnings increase, knocking shares back near their mid-August lows. Now, the stock is back to where it was before the earnings report. If it progresses much higher from here, I’ll restore our Buy rating. For now, Hold. HOLD

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, was up 12% this week to reach new all-time highs above 49! The big move comes on the heels of a rare down week for the stock, as Mike wrote last Thursday: “On Holding (ONON) had a weird wobble last week during a weak spell in the market when shares cascaded at the open—but they quickly found support, held their 25-day line and, today, lifted to new price and relative performance highs. Like our other names, we think the action is a sign ONON wants to head higher if the growth stock environment clears up, with big investors looking ahead to the firm taking huge share in footwear and athletic apparel/accessories in the years ahead. We’ll stay on Buy, but given the environment, try to buy on a little weakness if you’re not yet in.” Good advice. BUY

Rocket Companies (RKT), originally recommended by Mike Cintolo in his Cabot Top Ten Trader newsletter, was up from 19 to 20 in its first week in the portfolio. Here’s the latest from Mike on it: “RKT, which is heavily leveraged to all things mortgage lending, is likely to be news-driven with the Fed coming up (this) week. But we think it could be setting up an interesting entry point as it exhales from a big-volume, post-earnings move.” It’s anyone’s guess what the Fed will do this week and where RKT will be a week from now. But with Fed rate cutting about to commence, it’s a good bet that RKT shares will be higher months from now – perhaps much higher. BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, broke above 80 before pulling back today. Net-net, it’s up from the 77-78 range in the last week. As Carl noted, the three-pronged Singapore-based conglomerate registered more than 4 million first-time borrowers in its SeaMoney fintech wing in the second quarter, which was double the number it added in the same period last year. I still love this stock as a play on Southeast Asian growth that trades at just a fraction of its 2021 highs. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up 4% this week, likely in lockstep with the market given the lack of any major company-specific news. Nevertheless, the trend in TSLA shares is encouraging: It’s up 27% in the last three months, vs. a mere 3.5% gain in the S&P 500. Perhaps the stock, and electric vehicles as a whole (Rivian (RIVN) is up 23% in the last three months; BYD (BYDDY) is up 5.5%), have peaked investor interest again after getting knocked on their butts for months. We restored our Buy rating after Tesla’s big jump in July on a narrow deliveries beat, and we haven’t wavered despite many gyrations. After more than a dozen years of massive profits for Stock of the Week readers, the stock has certainly earned the benefit of the doubt! BUY

UnitedHealth Group Inc (UNH), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was down slightly but isn’t far off its highs. In his latest update, Tom wrote, “This healthcare insurer stock is looking strong. It’s been hot stuff for two months now and just made another new high in September while the rest of the world was going to Hell in a handbag. UNH soared over 20% since early July. It leveled off for a while but has regained the initiative. Earnings reinvigorated the stock. UnitedHealth beat earnings forecasts as it added more patients and pharmaceutical customers despite a continuing negative effect on profits from the February cyber-attack. UnitedHealth also reaffirmed previous guidance for 2024. It’s well positioned in a slowing economy as a highly defensive stock.” BUY

Viking Holdings (VIK), originally recommended by Mike Cintolo in his “Best Stocks to Buy in August” report, dipped below two-month support in the 32-33 range, so it’s time to say goodbye to it. I like the theory of owning shares of a luxury travel company at a time when travel spending has been restored to pre-pandemic highs. But the stock just isn’t cooperating. For it not to get a bump in a week when just about everything was up is a red flag. 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. This week we welcomed on new Cabot Turnaround Letter Chief Analyst (and Stock of the Week contributor) Clif Droke for an in-depth discussion on turnaround stocks, what Clif looks for, and why the Fed cutting rates could be an even bigger catalyst than thought. It’s worth a listen.

The next Cabot Stock of the Week issue will be published on September 23, 2024.

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