Cabot Stock of the Week Issue: September 3, 2024

Institutional investors didn’t waste any time starting their usual September selling, with all three major indexes down more than 1% in the first trading day after Labor Day. This is standard practice. Wall Street returns from its summer vacations and immediately starts selling off its worst performers, many of which have been left to fester for months on end.

It’s why September is, far and away, the worst month for stocks, with an average decline of -1.17% in the S&P 500 dating all the way back to 1928. The next-worst month is February, with a mere -0.14% decline. But the selling usually has an expiration date. In each of the last four Octobers, the S&P has reached a second-half bottom. All four times, the index has bounced back to higher levels than it was the Friday before Labor Day by the third week of Thanksgiving.

So, while the September swoon is real, and it may feel like the walls are collapsing at various points in the next few weeks, remember that the selling is almost always temporary, especially in a bull market – and perhaps even more so with the Fed about to cut interest rates and with the presidential election uncertainty just two months from having an answer.

In preparation for another September pullback, however, today we add a low-beta dividend stock that’s also demonstrating impressive growth. It’s a new addition to the Cabot Dividend Investor portfolio by Chief Analyst Tom Hutchinson. Here are Tom’s latest thoughts on it.

Constellation Energy (CEG)

Baltimore-based Constellation Energy is the largest nuclear power operator in the U.S. and the nation’s largest producer of carbon-free energy. It is an unregulated utility that supplies electric power to more than 20 million homes and businesses across the county. A diverse mix of hydro, wind, and solar paired with its industry-leading 21 nuclear reactors produce energy output that is 90% carbon free.

Three-quarters of Fortune 100 companies rely on Constellation for electric power. The company has 22.1 gigawatts (GW) of nuclear capacity compared to just 6.3 GW from its closest competitor. It operates more than a fifth of all the nuclear capacity in the country. Constellation also currently produces 10% of carbon-free power in the United States.

The nuclear aspect is a huge deal that sets Constellation apart. You may have reservations because you saw Chernobyl on Max, or you remember Three Mile Island. But technology is far superior today and nuclear energy is highly safe and reliable. And Constellation is ranked number one in terms of operational metrics among major nuclear generators. In fact, nuclear energy is one of the few areas today that enjoys bipartisan political support.

The reliability factor is huge along with the fact that it is clean energy. There are a massive number of carbon mandates and probably a lot more on the way as the government enacts legislation to address climate change. The problem is that clean energy alternatives to fossil fuels simply are not that feasible and reliable on a massive scale.

Nuclear provides the carbon-free benefits of solar and wind but it is also completely reliable 24/7 for 365 days per year. Companies can secure a power source that meets their carbon mandates long term while also not sacrificing any reliability. Nuclear is a highly reliable power source that functions without fail even when the wind stops blowing and it’s raining outside.

This has not escaped the eye of climate-conscious big tech companies in securing energy sources for their data centers. And major tech companies are expected to invest $1 trillion in data centers over the next five years.

Reliability is crucial for data centers and the seamless operation of the technology that defines these companies. These companies also think long term when locking up reliable power sources and achieving their carbon goals. As is logical, big tech companies are zeroing in on nuclear power plants for their massive data center expansions that offer the only combination of both carbon free and reliable.

With power demand from data centers expected to more than double by 2030, big tech is looking to make collocation deals with nuclear power facilities, whereby data centers are located next to nuclear power plants. In fact, the Constellation CEO has recently said the company is in “deep discussions” with several technology companies for such arrangements. A major source of electricity growth in the next few years is specifically targeting nuclear, and Constellation is king.

Constellation is forecasting average annual base earnings growth of 10% through 2028. But actual earnings growth should be much higher. The base growth doesn’t include enhanced earnings, which benefit from higher power prices and additional business acquired. And that’s where the real growth is over the next several years.

Constellation has only been operating independently with its own stock since 2022 when it was spun off from parent company and utility giant Exelon Corporation (EXC). Since the January 19, 2022, IPO, CEG has returned 308% compared to a return of just 22.5% for the S&P 500 over the same period. A key to Constellation’s stock performance is that, unlike most utilities, it’s not regulated. It’s free to sell its power wherever it chooses, and the government doesn’t set the rates.

Likely rising power rates is also a key aspect of future growth. Demand well exceeds supply currently. In the PJM area, renewable power generation supply is currently 25 mw per rolling 30-day average while the demand is 90 mw. And those numbers are before the anticipated spike in demand that lies ahead.

The current dividend is small at an annual rate of $1.41 per share, which translates to a 0.78% yield at the current price. But the dividend has already grown 150% over the first two years and the company is targeting 10% annual payout growth over the next several years. There is room for growth as the payout ratio is currently less than 17%.

Companies that grow the dividend consistently tend to be among the best-performing stocks on the market over time. Constellation also has investment-grade credit ratings and is shareholder friendly. It has so far completed $2 billion in share repurchases and has another $1 billion left on the current program.

It’s a great time for an investment in CEG. Not only is the company poised in front of a huge growth spurt in electricity demand, which will be even higher for clean energy, but it is in one of the most defensive industries at a time when the economy is slowing, possibly toward a recession. Power demand remains consistent regardless of the state of the economy. CEG provides an often sought but seldom found combination of both defense and growth. BUY

Current Recommendations

Changes Since Last Week:

Green Thumb Industries (GTBIF) Moves from Hold to Sell

Ollie’s Bargain Outlet (OLLI) Moves from Buy to Hold

Cannabis stocks have collapsed again as their primary near-term catalyst is no longer as near term as most people thought. So today, we say goodbye to Green Thumb Industries (GTBIF) and make room for something with more immediate upside. Ollie’s (OLLI), meanwhile, gets downgraded to Hold after a fairly “meh” earnings report. Outside of those two problem children, the rest of our portfolio is acting well, with 12 of our holdings up double-digit percentages and four others up at least triple digits.

That’s a good way to enter the year’s harshest month.

Updates

Alibaba (BABA), originally recommended by Clif Droke in his Cabot Turnaround Letter, was up from 81 to 82 in its first week in the Stock of the Week portfolio. The Chinese e-commerce giant has been unloved for years thanks mostly to the sluggish Chinese economy but, trading at less than 10x forward earnings and at a mere fraction of its 2021 highs, it has become wildly undervalued for a mega-cap tech stock that is still growing sales and earnings at very healthy clips. Thankfully, the stock was not dragged down last week by the sudden post-earnings implosion of Pinduoduo (PDD), its closest competitor in the Chinese e-commerce space. Clif likes Alibaba in part because “increasing expectations for a falling interest rate environment will not only encourage higher consumer spending levels (which have been repressed by inflation) but is already prompting institutional investors to turn their attention toward retail stocks with heavy digital exposure. And on that score, Alibaba is starting to grab the attention of this market-moving cohort.” BUY

AST SpaceMobile (ASTS), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, continued to decline ahead of this month’s satellite launches, falling to 29 after rocketing as high as 38 in late August. This kind of pullback was predictable and is why I advised selling up to a third of your shares after the stock exploded from 2 per share in May to 20 in mid-August and then nearly doubled again once this month’s launch was confirmed. There’s been no news since, and in a news vacuum that’s almost solely dependent on its five satellites launching in the first half of September like the company said, that silence is making traders antsy. If the satellite launches are successful, they would be the largest commercial communications arrays in low-Earth orbit in history. The company is developing a space-based cellular network that will provide global broadband service to every smartphone, starting with the U.S. It’s a big-swing, potentially revolutionary idea – hence the massive run-up in the share price. Even with the sharp downturn the last couple weeks, we still have a very big gain in ASTS in very little time. A successful – and on-time – launch in the next couple weeks could trigger another run-up in the share price. Buckle up. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, was up another 2% this week as shares of the U.K.-based life insurance and investment management firm stretch further into two-year-high territory in the mid-13s. The company’s India branch is under investigation for evading taxes and breaching commission regulations, though so far it hasn’t hurt the share price. 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 11.4x earnings estimates and at a mere 0.35x sales. The 6.5% dividend yield adds to our total return. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, pulled back from 142 to 140 after a big run-up from 127 the previous three weeks. BX is a “Bull Market Stock” (Mike’s term), which means it tends to outperform in bull markets, which it’s done – we have a 33% gain in just over a year, versus a 25% gain in the S&P 500 during that time. The stock traded as high as 143 in late July and has done a good job climbing back there after the late-July/early-August dip, but it’s thus far meeting resistance. A break to new highs above 143 would be quite bullish. But as long as the bull market remains intact, BX is likely to remain in our portfolio. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, has been flat ahead of earnings this Thursday, September 5. Nvidia’s much-anticipated earnings last week didn’t move the needle much for other artificial intelligence stocks, including Broadcom, despite beating estimates on the top and bottom lines. Tom notes that AVGO shares have had a “big price jump” after earnings in recent quarters. We’ll see if it can do it again. Continue to hold, at least until after the report. HOLD

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, is down more than 10% since we last wrote, giving back about half its earnings gains from the previous week. After bouncing from 102 to 125 following the earnings report, the stock has sunk back to 112 as of this writing. These types of pullbacks after big run-ups are normal – as with ASTS, I recommended selling up to a third of your shares after the big earnings gap. Mike isn’t worried, writing last Thursday, “Cava Group (CAVA) reported another terrific quarter last week, not just with the headline numbers (sales up 35%, earnings nearly triple last year, both figures coming in nicely ahead of estimates) but on the details, too, with same-store sales not just rising a huge 14.4%, but 9.5% of that was from traffic (the rest from pricing mix), which is rarified air in the restaurant industry these days. (It said its recent launch of grilled steak is far surpassing its expectations.) The stock went vertical on the results … though it’s hit some turbulence this week, first on the sale of some closely held shares (there was some insider selling, but those that trimmed still own a bunch of stock), and then today, from a downgrade where the analyst sees the stock as having run too far, too fast. After a three-week move from a low of 72 to a high of 125, we’re half-expecting some more weakness or at least tricky trading in the near term; if you have a big position (whatever that means to you), we’re not opposed to ringing the register with some of your shares. For our part, though, our position size is normal, so we’re going to hang on to our position—though we will keep our Hold rating intact and see how CAVA handles itself in the days ahead.” We will maintain our Hold rating as well until the stock settles down. HOLD

Dick’s Sporting Goods (DKS), originally recommended by yours truly in my Cabot Value Investor advisory, held steady ahead of earnings tomorrow, Wednesday, September 4. Analysts are anticipating $3.44 billion in sales with EPS of $3.83, which would mark a 35% improvement from a year ago. The sports apparel retailer has beaten EPS estimates in each of the last three quarters. Prior to this past week, DKS shares had run up 21% the previous three weeks, so it’s possible the stock price won’t budge much even if the company beats estimates again. We’ll see what happens tomorrow. BUY

DoorDash Inc. (DASH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, dipped slightly, from 129 to 128, on no news. The food delivery power saw a 20% increase in order volume in the second quarter, while revenues improved 23% and EBITDA soared 54%. Furthermore, the company may soon expand beyond just restaurant delivery into groceries, alcohol, beauty supplies and home improvement goods. The company is already growing fast, but there could be avenues for even greater growth ahead, which is why we added it to the portfolio a few weeks ago. BUY

Dutch Bros (BROS), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has been stuck in a range between 30 and 32 since mid-August. 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. 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, was up slightly this week to reach new all-time highs above 950! Nothing slows this stock down, Tom writes, “This superstar Pharma company that has outperformed most ‘Magnificent Seven’ stocks is on fire again. The earnings report absolutely killed it and guidance was raised by many billions as the weight loss drug continues to do incredible business while the other drugs aren’t too shabby either. … It also has a likely blockbuster in the newly approved Alzheimer’s drug. It’s expensive from a valuation standpoint but the growth justifies it.” BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, keeps rising to new all-time highs, poking its head above 167 before pulling back along with the market this morning. There’s been no news. Wall Street just likes the story: A former market darling known for its risqué Super Bowl commercials gains new life after introducing its first AI product, called the Airo. It helped the web domain registry company improve earnings per share by 76% in the latest quarter, and revenue per user has increased 5.5%. The stock has more than doubled since last November, and yet there may still be plenty of upside ahead thanks to its Airo solution. BUY

Green Thumb Industries Inc. (GTBIF), originally recommended by Michael Brush in Cabot Cannabis Investor, has fallen to new 2024 lows below 10 a share after it was announced that cannabis rescheduling – from a Class I drug (with heroin, cocaine, LSD and all the most dangerous drugs) to a far less harmful Class I drug – will not take place until after well after the election, in early December. That caught the industry by surprise and pushes the most likely near-term cannabis-sector catalyst back a couple months. In the absence of that catalyst, and with the stock trading at new 2024 lows, I can no longer rationalize keeping Green Thumb in the portfolio as a lottery ticket for when the cannabis sector finally awakens from its years-long slumber. That may happen by December, but December is a long time from now in an already-full portfolio. Let’s cut our losses in GTBIF and open up a spot down the road for a stock – and sector – with more immediate prospects. MOVE FROM HOLD TO SELL

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was up 1.5% and is flirting with new all-time highs. 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 83 to 84 in the last week. 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, keeps holding firm at 49. This business development company pays a monthly dividend ($0.245 per share), plus a supplemental 30-cent per share dividend due later this month. But the share price hasn’t budged in about a month, despite being clear of its early-August lows at 47. Perhaps it can get back to its early-July highs above 52, but until then, the monthly dividend payments are a nice consolation. BUY

McKesson Corporation (MCK), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was up 4.5% this week and is starting to claw its way back from its early-August collapse. Tom has been steadfast in his insistence that this pharmaceutical supply chain powerhouse would bounce back after a disappointing quarter in late July, and he’s starting to look right. Besides, McKesson’s primary sin in the quarter was that its weight-loss drug supplies couldn’t keep up with demand. Being in demand is a good thing, and the company is likely to get its supply problems shored up. It’s why analysts still expect the company to grow revenues by 14% and EPS by 17% this year. That’s a company worth investing in, especially while the share price is still well below its mid-summer highs. BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, was unchanged at 413 as news about the company was predictably quiet the last week of summer. The stock has underperformed this year (+10%) after a big 2023 but remains a must for any long-term growth portfolio due to its clear leadership position in the AI arms race. The AI catalyst may ebb and flow on Wall Street these days, but it’s not going away anytime soon, so neither will MSFT – arguably the most resilient tech stock of the 21^st century. BUY

Neo Performance Materials (NOPMF), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has surged back above 6 per share after dipping below 5 per share just three weeks ago. A new deal with China to sell its rare earths processing business for $30 million to China’s Shenghe has revived the shares, which are now within a whisker of 2024 highs. We upgraded the stock to Buy on news of the deal in last week’s issue. If you haven’t already bought, now would be a good time to do so. BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, is down slightly since our last issue and has been chopping around for the last two weeks. There hasn’t been much news for Netflix of late, or at least not since the streamer announced several new deals with the NFL, offering Netflix Premium to anyone with an NFL+ streaming account, and, more importantly, airing NFL games on Christmas Day – its first crack at live sports, which could open up a whole new revenue stream (no pun intended) for the company. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, keeps inching higher, going from 135 to 137 this week and touching as high as 139. The recovery has been encouraging after the stock dipped as low as 119 in early August, though shares remain well shy of their June highs near 147. A recent study showed that Novo’s popular Wegovy drug for weight loss has the added side effect of reducing Covid-19 deaths and illness. A previous study showed that Wegovy reduced risk of heart attack or stroke by 20%. At a time when the obesity drug competition is heating up – Eli Lilly (see above) is launching discounted versions of its obesity drug, Zepbound – more positive Wegovy results are good for this Danish drugmaker. We own both NVO and LLY in Stock of the Week since I think the weight-loss drug craze is revolutionary enough to lift all boats, especially the two clear pioneers and leaders in the nascent space. BUY

Ollie’s Bargain Outlet (OLLI), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, fell sharply after “only” meeting Q2 earnings estimates last Thursday. The quarter was far from a disaster – 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. Let’s give the stock another week to see if it bounces back; a dip below 86 support would likely have us moving to Sell, though I still like the upside for this bargain retailer. Let’s downgrade to Hold. MOVE FROM BUY TO HOLD

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, tacked on another point after reaching new highs above 45 the week before. Mike likes what he sees: “On Holding (ONON) has had tons of fits and starts during the past year, and like everything else, some near-term ups and downs are possible—but overall it certainly looks like the stock is starting to let loose on the upside, eclipsing its May high and aiming to notch new weekly closing highs above its post-IPO summit 30-plus months ago. Of course, the retail sector is very mixed these days—go look at Nike (NKE) or Lululemon (LULU) within the athletic shoe/apparel space, and while it’s a totally different area, see what Dollar General (DG) did today—but we see On Holding as benefitting as money moves into a fresher, more powerful growth story. We’ll restore our Buy rating given the breakout and are OK starting a position here or (preferably) on dips of a couple of points.” Having maintained our Buy rating all along, let’s keep it right there. BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, gave back a few points after a huge run-up the last few weeks of August. At 78, the stock is still just shy of its 2024 highs above 83. The rally came on the heels of a strong quarterly report in which all three of Sea’s major business segments – Garena (gaming), SeaMoney (fintech) and Shopee (e-commerce) – grew revenues by at least 20%. In particular, Shopee processed about 2.5 billion orders, which was a 40% increase from the year-ago period. Sea Limited is a great catch-all way to play Southeast Asian economic growth – and the stock trades at just a fraction of its 2021 highs despite having a very good year. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, held mostly steady this week, though the company reported good news, as its Chinese-made cars saw a 17% sales improvement in August over July, and a 3% year-over-year increase. While sales of China-made Teslas are still down 6% through the first eight months of 2024, the encouraging August could be signaling a turnaround in a country where Tesla has stiff competition from the likes of BYD, Li Auto, Nio and Xpeng. And it comes at a time when Tesla could use some good sales news in the wake of three straight underwhelming quarters. BUY

UnitedHealth Group Inc (UNH), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was up another 2% to reach new all-time highs right around 600 a share! The healthcare insurance giant has been gathering momentum since reporting a solid earnings quarter. And we have a nice double-digit gain on the stock in less than four months. BUY

Viking Holdings (VIK), originally recommended by Mike Cintolo in his “Best Stocks to Buy in August” report, is back down to its post-earnings level around 33 a share. While sales improved 9% year over year, both revenue and earnings fell short of analyst estimates. While sales barely missed ($1.59 billion vs. $1.60 billion expected), EPS ($0.37) was well short of estimates ($0.66) and represented an 18% year-over-year decline. Bookings, however, remained strong at 20% growth. All told, shares are down about 8.5% since the report, as investors are focused on the misses. Let’s keep an eye on the 33 level to make sure it keeps acting as support. For now, keeping this river cruise line specialist at Buy. 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. Mike Cintolo joined us this week to discuss the state of the market – and why he thinks the next major move will be up!

The next Cabot Stock of the Week issue will be published on September 9, 2024.

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