Cabot Stock of the Week Issue: September 23, 2024

Well, there it is, the first rate cut in four and a half years!

And the Fed isn’t messing around, starting with a 50-basis point (0.50%) cut right off the bat – perhaps a tacit admission that they should have started cutting in July, or possibly an aggressive first “shot” to make it clear they’re serious about staving off a recession and worried, at least to some degree, about the recent jobs numbers. Regardless, the market likes the aggression, with the S&P 500 and the Dow up to new highs (although the Nasdaq has lagged). A lower-interest-rate (and low-inflation) environment has historically been good for stocks, so the action in the days since Jerome Powell’s big announcement/press conference may well be a sign of things to come. And maybe, just maybe, we can stop talking about the Fed so much – or at least stop worrying about the Fed.

In the spirit of the Fed’s big cut and the market’s new highs, today we add a fast-growing stock that’s the leader in a suddenly omnipresent new (and newly legalized) field: online sports betting. It was the Top Pick in Mike Cintolo’s Cabot Top Ten Trader advisory last week.

If you haven’t already guessed the name by now, here it is, with Mike’s latest thoughts.

Flutter Entertainment (FLUT)

Flutter Entertainment is the owner and operator of FanDuel, the leading online sports betting platform in the U.S. (just above DraftKings) as well as having a big presence overseas (often through its BetFair brand), and it also has a good-sized iGaming (online casino) angle, too. There’s no question that the online sports betting sector is in a long-term growth phase, though there have been some tough periods for the stocks, first due to the industry shakeout (2022-2023) as money became tighter and ridiculous sign-up bonuses came down to Earth; and, more recently, uncertainty surrounding state tax policy (a few have hiked taxes on winnings), which has caused some reactions (surcharges on winnings from DraftKings) that has resulted in some backlash. Still, as we said, the long-term growth trend is definitively up, and the best example of that is how quickly business is growing even in “mature” locations: For FanDuel, U.S. states that it’s been up and running in since before 2020 still grew 27% in Q2 (compared to 45% for those in 2022/2023), a sign there’s plenty of untapped potential out there, both in terms of new sign-ups and higher gambling per client. To be fair, the firm’s international operations are a big part of the story, producing nearly two-thirds of the total EBITDA for Flutter and growing decently (up 15% in Q2); a recent acquisition in Brazil will push it further into that market in the quarters ahead. But the U.S. segment is clearly the growth driver and where most of the investment is being seen, with a 39% revenue gain, a 27% gain in monthly bettors and a 51% surge in EBITDA in the latest quarter, and with basically all other key metrics pointed in the right direction. We like the accelerating revenue growth, and Wall Street sees earnings and free cash lifting beautifully from here.

As for the stock, FLUT is essentially near the top of a year-and-a-half-long consolidation, with the 210 to 220 area providing resistance in the early/middle period of 2023 and again in early 2024. That second peak led to a multi-month correction, with shares finding support three times in the 175 to 180 zone before the Q2 report in August brought a nice gap up. FLUT has since traded very tightly and is now beginning to attack its old highs. We’re fine starting small here and buying more on a decisive breakout. BUY

Current Recommendations

Changes Since Last Week:
Broadcom (AVGO) Moves from Hold to Buy
Cava Group (CAVA) Moves to Sell a Half, Hold the Rest
Neo Performance Materials (NOPMF) Moves from Buy to Sell
Ollie’s Bargain Outlet (OLLI) Moves from Hold to Buy

Lots of moving parts today, most of them good. Broadcom (AVGO) and Ollie’s Bargain Outlet (OLLI) have their Buy ratings restored after weeks of steady recovery following their early-August declines. Meanwhile, we issue a rare “Sell a Half” rating on Cava Group (CAVA) after the stock has more than doubled in the six months since we added it to the portfolio – though we’re certainly not ready to give up on the stock altogether. Finally, the one casualty this week is Neo Performance Materials (NOPMF), which has been a perfectly fine stock for us (+15% in three and a half months) but has stagnated the last couple weeks on some questions about the motivations behind a recent sale.

Also, check out some of the major moves a few of our stocks made this week, namely Constellation Energy Corp. (CEG), whose shares got a 35% bump (!) after striking a deal to provide nuclear energy to help power Microsoft’s AI data centers. It’s probably the first time the words “Three Mile Island” have inspired excitement from investors – or anyone.

Enjoy!

Updates

Alibaba (BABA), originally recommended by Clif Droke in his Cabot Turnaround Letter, continues its September resurgence, advancing from 84 to 88 and knocking on the door of new 52-week highs. A collaboration with Nvidia gave BABA shares their latest nudge. The Chinese e-commerce giant and the artificial intelligence leader are teaming up to offer an autonomous driving solution created by Alibaba Cloud, Alibaba’s cloud computing wing. Specifically, Alibaba unveiled a large multimodal model (LMM) solution for automotive applications intended to boost the autonomous driving experience for electric vehicle owners in China. Because China has been dealing with U.S. sanctions on semiconductor trade, Chinese companies’ access to Nvidia’s and other companies’ AI chips has been limited. Chinese EV makers like Li Auto, Geely Auto and Great Wall Motors have already been using the Nvidia Drive automotive platform to power their next-generation fleets, and this will be the first integration of Alibaba Cloud’s large AI models. Investors like the deal’s potential (they like any report that has to do with “AI” and “Nvidia” these days), sending BABA shares gapping up from 84 to 88 last Friday. It’s merely the latest reason to buy Alibaba with shares trading well below their 2020 highs. BUY

AST SpaceMobile (ASTS), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, pulled back from 29 to 26 in the absence of anything new about its five Bluebird satellites launched into low-Earth orbit the week before. As Tyler noted in his latest update, “AST SpaceMobile (ASTS) pulled off a successful launch of the BlueBird satellites, so now we’re waiting on an update regarding when limited service will actually start and what the updated plans are to get more satellites up and running. More updates to come in due course as this exciting story gains steam.” The stock may be in a bit of a holding pattern until we get more news. But there’s no doubt that plenty of upside remains even after an incredible four-month run. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, keeps inching back toward its late-August highs 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 6.6% dividend yield adds to our total return. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has broken out of late as the market has risen to new highs, further fortifying its reputation as a “Bull Market Stock” (Mike’s term). The Fed’s 50-basis point cut helped accelerate BX’s rally, with shares racing from 127 in early August to new all-time highs above 158 now. Mike calls BX “an easy way to play an easier money environment.” So, with the bull market in full swing and an easier money environment now underway, BX may still have more room to run even at record highs. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was up 5% this past week as the stock is touching two-month highs above 170. AVGO shares have climbed out of a late-August/early-September hole after reporting disappointing earnings. As Tom noted in his latest update, “The decline was undeserved. … The AI part of the business, where the future growth is, was even better than expected. The flat parts of the business are cyclical and will likely bounce back in the quarters ahead. The AI trade is languishing now, but it certainly isn’t dead. Lost time can be made up very quickly in this arena.” Seems like that’s what’s happening with AVGO already. Tom restored a Buy rating on Broadcom last week. Let’s do the same. MOVE FROM HOLD TO BUY

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, was up more than 7% this week to reach new all-time highs above 130! There was no news for the fast-growing, fast-casual Mediterranean food chain, whose restaurant count is likely to grow 15% annually for the foreseeable future. The stock has now more than doubled since we added it to the portfolio back in April. If you got in early, I highly recommend selling up to HALF of your original position to book profits – for all its growth, I doubt CAVA will double again in the next six months. Given that run-up in such a short period of time, I’m instituting a rare Sell Half, Hold the Rest rating on CAVA today. If you’re new to Stock of the Week or have not yet bought CAVA, you could potentially start small on dips. But our official rating is … SELL HALF, HOLD THE REST

Constellation Energy Corporation (CEG), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, is up 35% in the last week! Why the major gap up? Microsoft. The nuclear energy-driven utility has entered into a partnership with Microsoft to provide the tech company with nuclear energy by reopening the nuclear power plant on Three Mile Island (yep…that Three Mile Island). The plant won’t open until 2028; nevertheless, Wall Street sees any energy deal with AI leader Microsoft (artificial intelligence requires quite a bit of energy usage) as a major long-term catalyst for Constellation, hence the big run-up in CEG shares. The new plant is expected to generate 800 megawatts of electricity for the grid. Tom added Constellation to his portfolio recently based largely on the resurgence in demand for nuclear energy in light of the AI spike, which requires way more energy usage to power its data centers. And here is a prime example of that benefitting the utility company that provides that energy source. Our timing here seems to have been ideal, though I’d expect some short-term wobbles after such a big rally. BUY

Dick’s Sporting Goods (DKS), originally recommended by yours truly in my Cabot Value Investor advisory, was down slightly in the last week on no news. Given the steady growth, shares remain relatively cheap at 16x forward earnings. They have 19% upside to the 250 price target I set in Cabot Value Investor. BUY

DoorDash Inc. (DASH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up 7% this week and is closing in on its April highs. Here’s Mike’s latest on it: “Despite a bevy of competition (especially from Uber Eats), the company remains the King of Delivery, an industry that, up until a few years ago, was basically non-existent or at least only run by local operators (getting the local pizza place to deliver to your house, for instance), but the pandemic accelerated what should be a multi-year trend in the sector, and as the leader (about three times the market share of Uber in meal deliveries), DoorDash is going to benefit. Part of that is thanks to the network effect—the firm has the broadest selection by far, which attracts even more merchants to its platform. Indeed, more than half the restaurants that come into the industry select DoorDash—and part of that is the firm’s advanced logistics network, which it says has the lowest costs in most locations in the U.S. Importantly, while meal delivery is by far the biggest category, items from grocery stores, convenience stores and more are seeing great growth (and, by the way, the firm is getting about half of new merchant entrants in these industries as well). Throw in an international angle (it owns Wolt, which has the service up and running in 500 cities overseas) and a popular subscription product (DashPass is about $100 per year and provides free delivery on meal orders over $12 and grocery orders over $25; there were reportedly over 18 million subscribers at the end of 2023), and the firm oozes steady, reliable growth for many years to come. Q2 showed a continuation of all recent trends, with orders volume up 20%, revenues rising 23% (revenues came in at 13.3% of order volume) and EBITDA (the most meaningful profit metric here) of $430 million, up a big 54% from a year ago while total users were up double digits in June. Shares had a nice run through March before suffering a tough downturn (31% deep)—but the summer earnings report brought in the buyers and DASH has since traded strongly since as it rounds out a fresh launching pad.” BUY

Dutch Bros (BROS), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was up another point, from 33 to 34, as shares of the upstart drive-through coffee chain continue their recovery from a sharp drop below 30 in late July and early August. The company has doubled its store count and tripled sales since 2020. It plans to double its store count in North America again by 2026 and is looking increasingly toward international expansion (it’s based in Oregon). BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, has settled into a range in the low 900s this month after topping out around 960 in late August. As Tom notes, “The pharma superstar stock pulled back from the high this month for a dumb reason. Novo Nordisk A/S (NVO) is experiencing supply shortages for its weight loss drug. Ozempic is the biggest competitor for Lilly’s new weight loss drug, and there is fear that Lilly may have supply problems too. But Lilly is reporting an easing of supply constraints. Novo had supply problems last quarter and Lilly didn’t. There’s no reason to assume these problems will apply to Lilly. Plus, competitor stumbles are a good thing. It’s also a good thing when a drug is in such demand the main challenge is making enough of it.” The recent tightening of the range could mean LLY shares are poised for another run higher soon – or at least that’s been their pattern the last couple years. Regardless, this is one of the best growth (and dividend) stocks on the market today. BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, didn’t stay down long, rising 6% this week after falling by that same amount the week before. There’s been no news, although Piper Sandler downgraded the stock from “Overweight” to “Neutral” in a research note out today. But that goes against the grain of what most analysts are thinking – the average price target is 170, or 7% above the current price. GDDY shares have been on a tear since the web domain registration specialist rolled out its first AI feature, Airo, last November. I think there’s more juice to squeeze here. BUY

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, mostly held firm although it’s meeting resistance in the 492-494 range – its previous highs. 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, just keeps inching to new highs, this time from 86 to 87. 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, broke above 50 for the first time since early August, perhaps with an assist from its ex-dividend date last Friday (September 20). The monthly dividend payer will pay $0.245 per share every month the rest of the year, though those who missed last week’s ex-dividend date missed out on the supplemental 30-cent-per-share dividend. Still, this business development company is steady as she goes, and is a nice back-pocket holding in case the market goes south. For now, it’s just a reliable source of income with a rising share price. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up another 1% this week as it continues its post-August recovery. In his latest update, Tyler noted, “Microsoft (MSFT) just announced a new, multi-year $60 billion share buyback program and hiked the dividend by 10%. And yesterday after the close, the company announced it will partner with BlackRock (BLK), Global Infrastructure Partners and MGX, collectively called the Global AI Infrastructure Investment Partnership, to invest up to $100 billion building AI data centers. Most will be in the U.S., with some in U.S. partner countries. Nvidia (NVDA) will support the partnership with expertise in AI data centers and factories. This is very new news and there will be a lot to learn in the coming weeks. Bottom line, Microsoft continues to be at the front of every big technology trend.” BUY

Neo Performance Materials (NOPMF), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has been sliding this month after spiking above 6 a share to close out August. A $30 million deal to sell its rare earths processing business to China’s state-owned Shenghe initially acted as a tailwind for shares, but the wind has come out of their sales a bit and Carl himself sold NOPMF shares after noting that Neo was “essentially forced” to sell its rare earths business. That all sounds a bit fishy, and if Carl bailed, it probably makes sense for us to do the same while we still have a respectable profit. MOVE FROM BUY TO SELL

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, is up to new all-time highs above 707 a share! There’s been no news, although its success with the hit new Nicole Kidman-starring limited series The Perfect Couple is the latest evidence of the streamer’s ability to create original, star-driven content that brings in lots of eyeballs. Recently, 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, is down more than 9% in the last week after some side effects were reported in a Phase 2a clinical trial of its new obesity drug candidate, monlunabant. The side effects included gastrointestinal issues, anxiety and sleep disruption. Yikes. So, that’s not great. Fortunately, Novo already has two highly successful weight-loss/diabetes drugs in Ozempic and Wegovy, with Ozempic sales up 30% to $4.26 billion in the last quarter while Wegovy sales were up 69%. Meanwhile, it has another weight-loss drug – a daily pill called amycretin – in the works; in a Phase 1 clinical trial, amycretin caused test patients to lose 13.1% of their body weight in just 12 weeks. So there’s still plenty to like about this Danish big pharma, and shares, while down, are still above their August lows. Looks like a good entry point into one of two clear leaders (along with Eli Lilly) in a revolutionary new market. BUY

Ollie’s Bargain Outlet (OLLI), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, was up 2% this week and more than 13% in September. There’s been no news, so the recent momentum in the absence of an obvious catalyst is encouraging. The discount retailer should hold up well in any economy, but the projected 8.8% sales growth and 12.7% EPS growth this year make this more of a growth story. Let’s restore our Buy rating. MOVE FROM HOLD TO BUY

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, tacked on another point to top 50 a share for the first time ever! In his latest update (from last Thursday), Mike wrote, “ONON got hit with some selling today after attempting to surpass round-number resistance near 50, but overall it continues to act well, hitting new highs yesterday after a brokerage house hiked their price target and trading well above even its 25-day line (near 46). There are no sure things, of course, but to us it looks like this name just broke out three weeks ago from a huge rest period (you can call it a base-on-base, or simply go with the fact that ONON made no net progress from July 2023 to August 2024), so if the market cooperates, shares should be relatively early in their overall run given the long runway of growth that should be ahead. Obviously, then, we remain optimistic that the path of least resistance is up, though given the still-tricky market, another wobble into support (mid-to-upper 40s) isn’t out of the question.” BUY

Rocket Companies (RKT), originally recommended by Mike Cintolo in his Cabot Top Ten Trader newsletter, was down this week but remains in a six-week range between 18 and 20. As Mike recently wrote, “RKT looks like a classic turnaround, cyclical play in the mortgage industry, having come through the dry times leaner and meaner, and is ready to enjoy what could be a fruitful, multi-year upturn in mortgage activity. Shares have been hectic of late (down, then right back up, and then some post-Fed selling) but remain above support.” BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is up 12% in the last week to reach new 52-week highs above 89! Its Shopee e-commerce wing struck a deal with Alphabet’s YouTube in Indonesia, hoping the video platform will help it reach more online shoppers, while trying to hold off threats in the Southeast Asian e-commerce space from up-and-comers like TikTok and Lazada (owned by Alibaba). Shopee still dominates the region, with a 48% share of the Southeast Asian market. Shopee is one of three major, disparate businesses Sea Limited operates, along with Garena (gaming) and SeaMoney (fintech). That diversity makes Sea Limited a great catch-all way to play Southeast Asian growth – one of the fastest-growing regions in the world – at a time when the stock trades at a fraction of its 2021 highs. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up another 9% this week and is clawing its way back toward July highs. The latest catalysts include the company setting a date (October 10) for the unveiling of its anticipated robotaxi vehicle, and Barclays analyst Dan Levy issuing a note saying he expects third-quarter deliveries to rise 8% to 470,000, comfortably above the 461,000 deliveries estimates. The last time Tesla’s deliveries came in a bit higher than estimates, in the second quarter, it drove shares above 260 (at least temporarily) for the first time all year. If Tesla’s actual deliveries match Levy’s rosy forecast, another bump could be in order – though it’s possible that some of the gains are already baked into the cake after the stock’s recent run-up from 191 in early August. BUY

UnitedHealth Group Inc (UNH), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was down about 2.5% this week after the Federal Trade Commission (FTC) accused it, CVS Health and Cigna of inflating the price of insulin. Being sued by the U.S. government is never a good look, and right now it’s weighing on UNH shares. Though, in the grand scheme, the damage has been limited thus far – especially given that the stock touched new all-time highs just a couple weeks ago. Let’s see how it behaves in the coming week, and whether the bad news-related selling dies down. BUY

Veralto (VLTO), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was flat in its first week in the Stock of the Week portfolio. In his latest update, Tyler wrote, “Veralto (VLTO) had reported Q2 results a few weeks before I added the stock last month, and there hasn’t been any news since. 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.” 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 September 30, 2024.

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