Cabot Stock of the Week Issue: September 30, 2024

Stocks normalized this past week, with little movement after the big post-Fed bump the previous week. That’s not a bad thing – holding gains at all-time highs qualifies as a victory, especially with so many potential landmines (upcoming presidential election, spreading violence in the Middle East, the next U.S. jobs report this week) out there.

I could see a scenario in which there’s either not much movement or a bit of a pullback from the highs in the coming month. October is a notoriously scary month for investors anyway, with significant bottoms coming in each of the last two years. For another one to occur would require a hefty drop-off – even more precipitous than the 8.5% decline in the S&P 500 in late July and early August. It’s possible, but I think the Fed’s aggressive rate cutting should act as a floor, even without more cuts coming until after the election. Still, some short-term wobbles wouldn’t surprise me one bit.

With that in mind, today we add a value stock that captured Warren Buffett’s attention – and money – last year. It’s one of the largest financial institutions in America – one that could become a LOT bigger in the very near future. I added it to my Cabot Value Investor portfolio in early August, and I think it offers just as much upside now as it did then.

Here it is, with my latest thoughts.

Capital One Financial (COF)

Capital One Financial is one of those American companies that feels ubiquitous.

From their nonstop television commercials featuring Samuel L. Jackson, Spike Lee, Charles Barkley, and Jennifer Garner (among others) and their catchy, “What’s in Your Wallet?” slogan, to their sponsorship of college football’s Orange Bowl (er, I should say, the “Capital One Orange Bowl”), to its myriad bank branches (it has 280 of them across the U.S.), Capital One seems like it’s been around forever.

And yet, it hasn’t. The company is only 30 years old, founded on July 21, 1994. It’s a diversified bank that provides banking services to consumers and businesses, as well as auto loans. Though it is probably best known for its credit cards, hence the “What’s in Your Wallet?” tagline. It’s the fourth largest credit card company in the U.S., with $272.6 billion in purchase volume in the first half of 2023 alone, according to U.S. News and World Report. And it’s on the cusp of getting even bigger: Capital One is in the process of acquiring fellow credit card giant Discover Financial (DFS) for $35 billion. If approved, the deal could be completed either later this year or early next year.

Even absent the Discover buyout, Capital One is growing just fine on its own. Its revenues have expanded from $28.5 billion in 2020 to $36.8 billion in 2023; this year, they’re expected to swell another 5%, to $38.7 billion, with another 5% uptick estimated in 2025. Earnings per share are expected to expand 5% this year and 20.6% next year.

Those estimates may be modest, as they don’t necessarily account for the impact of lower interest rates. Capital One has been growing steadily despite high borrowing costs for things like auto loans and credit cards, which may soon be less of an obstacle.

COF stock is having a solid year, up more than 13% and currently trading at a new 52-week high. And yet, shares remain cheap at 10.7x forward earnings estimates, 1.51x sales and 98% of book value. The share price peaked at 177 exactly three years ago, in August 2021; it currently trades at 149 a share.

The bank has caught Warren Buffett’s attention. In May 2023, Berkshire Hathaway disclosed that it had taken out a nearly $1 billion stake in Capital One. To be sure, that’s a modest stake by Berkshire’s standards – it represents less than 1% of the company’s portfolio. Nevertheless, COF shares are up nearly 70% since Buffett’s bet on it.

With earnings per share expected to rise more than 25% by the end of 2025, and with Discover Financial possibly adding an even greater windfall should the deal gain approval, let’s set a price target of 185. Even at current estimates, reaching that share price would only give COF a forward price-to-earnings ratio of less than 11 – less than the average valuation of large-cap financials at the moment. A 185 price target gives us 23% upside from the current share price. That could prove conservative. I think COF could get there quickly, especially now that the Fed is finally cutting rates – and fast. BUY

Current Recommendations

Changes Since Last Week: None

No changes today, so our portfolio is overcrowded at 27 stocks. Next week, at least one – if not two – will have to go, as we try and prune it down to our preferred 25-stock size. It’s a good problem to have, not finding any stocks worth selling this week. Most of our positions are acting quite well, especially Alibaba (BABA), thanks to a major (and rare) boost from China’s central bank. That’s where we get started today – with a stock that has been on a tear since we added it to the portfolio a month ago.

Updates

Alibaba (BABA), originally recommended by Clif Droke in his Cabot Turnaround Letter, had a fantastic week, rising 24% with a big assist from China’s central bank, which is finally cutting rates (among other measures) to help stimulate China’s sluggish economy. At 112 a share, this is the highest BABA shares have been since early 2023. There were also company-specific catalysts, as Clif noted in his latest update: “Alibaba released over 100 open-source AI models as its Cloud unit’s annual flagship event, Apsara, got underway. The company also unveiled a new text-to-video tool based on its AI models.

“According to a CNBC report, ‘The open-source models are based on the company’s large language model, or LLM, Qwen 2.5, and are designed for use in areas including, automobiles, gaming and science research. The LLMs also have more advanced capabilities in math and coding.’”

There’s so much to like about BABA, and the stock is off to a very fast start for us. But given the strength of the runup, I’d start new positions on dips of at least a couple points if you haven’t already bought. BUY

AST SpaceMobile (ASTS), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, is experiencing a predictable post-satellite launch hangover, with shares shedding another point down to 25 this past week. The stock had a major runup from 2 to as high as 38 this year in advance of its launch of five “BlueBird” low-orbit satellites earlier this month. Now, Wall Street wants to see if they actually work and help ASTS accomplish their rather revolutionary goal of bringing satellite broadband service directly to people’s smartphones. Shares will likely be back. But they’re currently going through some short-term growing pains. Which spells opportunity if you missed the boat the first time around. 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, was off slightly, from 157 to 155, after a big run the previous few weeks. Still, overall the stock has lived up to its reputation as a “Bull Market Stock” (Mike’s term), with shares up nearly 50% since we added it to the portfolio last August. Here are Mike’s latest thoughts on it: “Blackstone obviously isn’t some sort of emerging blue chip, as it’s the largest alternative asset manager and one of the largest Bull Market stocks with north of $1 trillion of assets. But, to us, that’s a very good place to be for the next few quarters as money becomes looser, and as we wrote in the last issue, the stock has staged a longer-term breakout and is now pulling back normally.” BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was exactly flat at 170 after big gains the previous couple weeks. We upgraded it back to Buy last week based on that momentum. In his latest update, Tom wrote, “This AI powerhouse has bounced around since its stellar earnings report and announcement of a 10-for-1 stock split in June. AVGO was upgraded earlier this month, and the other one-half position was added back after the stock took a beating in the beginning of this month. The AI trade has lost a lot of 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.” BUY

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, was down from 128 to 123 this week but still looks great overall. In fact, it was up so much – more than doubling since we added it to the portfolio this April – that we advised selling half your shares last week and holding the rest. We’ll keep our rating right there. Here’s what Mike had to say about it in his latest update: “Cava Group (CAVA) looks fine, actually kissing new price and RP highs last Friday, though we wouldn’t say buying power has been overwhelming. We don’t have any brand new thoughts here—the main trend is obviously up and the story is as close to ‘the next Chipotle’ as there’s been in many years, but shares have had a huge run during the past 10 months and are floating higher. We’re holding what we own and are enjoying the ride but continue to look for a higher-odds entry point before restoring a Buy rating.” Good advice. Let’s do the same. HOLD A HALF

Constellation Energy Corporation (CEG), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, held its gains at 255, which is almost as impressive as its 35% gap up the week before! The big bounce came from its new deal with Microsoft to reopen the infamous nuclear power plant on Pennsylvania’s Three Mile Island to help power Microsoft’s myriad data center needs in the AI era. As Tom noted, “Details of the agreement are yet to be released, but management at Constellation says it is the largest electricity purchase in history. It should add to Constellation’s already projected double-digit earnings growth over the next several years. The deal 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.” BUY

Dick’s Sporting Goods (DKS), originally recommended by yours truly in my Cabot Value Investor advisory, pulled back from 217 to 207 on no news. The air has come out of the balloon a bit since its big post-earnings bounce in late August, which pushed shares up to 239. But the stock is still holding perilously above its lows. As long as it doesn’t dip below 206, we’ll keep DKS on Buy. Given the steady growth, shares remain relatively cheap at 15x forward earnings. They have 20% 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, kept rising, inching up from 139 to 142, a new 52-week high! The only real news this week was that KeyBanc upgraded the stock from “Sector Weight” to “Overweight” – the second big upgrade this month after BTIG upgraded from “Neutral” to “Buy” on September 19. There’s clear momentum for this food delivery service as it expands into grocery stores, convenience stores and other places. With revenue up 23% and EBITDA up 54% in the latest quarter, this looks like an accelerating growth story. BUY

Dutch Bros (BROS), originally recommended by Carl Delfeld in his Cabot Explorer advisory, pulled back from 34 to 32 this week on no news. It’s still up from 30 a month ago but down from July highs above 42. The drive-through coffee chain 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, was down another 4% this week to dip to its lowest point since early August. There’s been no reason for the sharp pullback; if anything, news for the company has been good, as it gained approval for a new Alzheimer’s drug, Kisunla, in Japan, perhaps paving the way for its donanemab Alzheimer’s candidate to gain approval in the U.S. If approved, it could be another blockbuster drug for a company that already has several of them, including weight-loss giants Mounjaro and Zepbound. I have no long-term concerns about the company or the stock, and I view this recent steep dip as a prime buying opportunity. BUY

Flutter Entertainment (FLUT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had a good first week in our portfolio, rising 2% despite pulling back the last couple days after reaching as high as 244. Here’s what Mike had to say about it: “Flutter Entertainment (FLUT) released a very bullish long-term forecast at its Investor Day this week that buoyed the stock. (T)he entire company (U.S. and international gambling operations) can see the top line lift at a 14% annual clip through 2027, while EBITDA lifts 28% annually and free cash flow compounds at 36% (reaching $2.5 billion in 2027). Just within the U.S., in fact, Flutter sees EBITDA within its existing states tripling in the next three years! News of a $5 billion share buyback program (to be deployed over the next three to four years) also helped the cause.” BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down slightly from 158 to 156 on no news. The web domain registry giant still has plenty of momentum, with shares up 47% year to date mostly on the strength of its new AI solution, Airo, unveiled last fall. Upside may be somewhat limited from here given that run, but we’ll keep it on Buy for now, especially after the recent mini-pullback. 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, was down from 87 to 86 after gaining that same amount the previous 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, held firm just a hair over 50. In his latest update, Tom wrote, “MAIN took a hit in early August from the temporary recession scare, but it has recovered and has been trending higher since. Plus, it barely budged in the down market in the first week of September. A recession would certainly change the dynamics. However, solid earnings and reduced recession fears are leveling the stock.” 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 off about 1.5% for no good reason. On the heels of its aforementioned Constellation Energy/Three Mile Island investment, the company poured another $1.3 billion into improving its cloud and AI infrastructure in Mexico. Clearly, mega-cap tech has boatloads of money and isn’t afraid to use it to help fine-tune and fortify its new cash cow, artificial intelligence. MSFT should benefit from all that investment – and Microsoft’s AI leadership position – for years to come. This is a long-term must for any portfolio. BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down very slightly from 707 to 705 after hitting new all-time highs last week. There’s been no major news. 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 should be a core holding for any long-term growth investor. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, has, like its big pharma brethren LLY, been having a rough go of late, with shares down nearly 5% this week after a 9% pullback the week before. High prices for its signature weight-loss drugs have been a sticking point of late, says Carl: “In the U.S., the list price for Ozempic is $968 for a month’s supply. The list price of Wegovy in the U.S. is $1,349.02. The cost of these popular medications is cheaper in other countries. For example, Ozempic is just $59 in Germany and Wegovy is only $92 in the U.K. Some analysts estimate that 72% of Novo Nordisk’s revenue since 2018 has come from U.S. sales. Most likely, Congress will attempt to bring U.S. prices down and the question is whether more scale will make up for lower prices.” Keeping at Buy for now, but if the stock falls decisively below multi-month support at 119, we may have to downgrade to Hold and wait out the current wave of selling. BUY

Ollie’s Bargain Outlet (OLLI), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, was off about 4% this week on no news. That’s been the nature of this bargain retailer since we added it to the portfolio two months ago: two steps forward, two steps back. It’s up 12% in September but is still shy of its July highs above 103. If it can break through resistance in that area, we may finally have something. BUY

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, held its highs above 50. In his latest update, Mike wrote, “On Holding (ONON) has seen a little stalling action near round-number resistance near 50, but that’s all the sellers have been able to do, as ONON remains perched near new high ground. As we wrote in last week’s issue, this is one of many names that looks to be taking off from a huge launching pad, and the RP line is hitting multi-year highs as well, both of which bode well assuming the market cooperates. We’ll stay on Buy, but as with everything else, some near-term wobbles are possible given the recent advance.” We’ll stay on Buy as well. BUY

Rocket Companies (RKT), originally recommended by Mike Cintolo in his Cabot Top Ten Trader newsletter, was up about 2% this week but hasn’t gotten the big bump yet from the Fed slashing interest rates by 50 basis points. There’s been no company-specific news. Still, the stock is near the top of its recent 18-to-20 range; a break above there and we could be off to the races. BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, just keeps on adding, tacking on another 5.5% after rising 12% the previous week. It currently trades at a new 52-week high at 94 and has more than doubled in the last year! And yet, shares of this Singapore-based conglomerate are still well below their late-2021 top (357). Its Shopee e-commerce wing has really taken off. Shopee dominates fast-growing Southeast Asia with a 48% market share; in addition, Sea Limited offers digital-payments provider SeaMoney and Garena, a global online games developer. This is one of our highest-conviction buys. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is cooking in a way it hasn’t all year, with shares up another 3.5% this past week and on the brink of matching their July highs. Whether it can sustain that momentum this time, however, all comes down to this Wednesday’s Q3 deliveries report. After a slight beat on Q2 deliveries – which finally awoke TSLA shares from their year-long slumber – analysts are a bit more optimistic this time around, projecting 461,000 deliveries in the third quarter, which would mark a 6% increase from Q3 a year ago. It would also represent Tesla’s third-highest quarterly delivery total ever. With the share price soaring, is it setting up for another big tumble if the EV maker delivers only a modest beat? We’ll see. But for now, it’s a Buy. BUY

UnitedHealth Group Inc (UNH), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was up about 1.5% after bouncing off 573 support. Here’s Tom’s latest analysis: “The health insurance behemoth started the month off hot while the rest of the market was getting crushed. But as the market recovered UNH pulled back slightly. It seems to be a stock in higher demand when the market gets ugly because it’s defensive. UNH is a good hedge in case the market struggles and/or a recession becomes more likely. UnitedHealth beat earnings forecasts last quarter 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

Veralto (VLTO), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, hasn’t budged much since we added it to the portfolio two 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 Tyler Laundon to discuss the potential for a long-overdue small-cap stock rally. It’s worth a listen!

The next Cabot Stock of the Week issue will be published on October 7, 2024.

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