Cabot Stock of the Week Issue: September 5, 2023

Labor Day is behind us, which means Wall Street is back from its summer vacation and ready to start trading again. Typically, that’s bad news, as hedge fund-types return from their yachts and Hampton estates itching to sell off their long-neglected laggards, which is why September is notoriously the worst month in terms of stock performance. Given the nice snapback in the indexes the last couple weeks after a brutal first three weeks of August, odds are stocks will be down this week.

But from my perspective, seasonality is the only thing standing in the way of this bull market. Give it a week or two of obligatory September selling, and I bet the market gets fully back in gear. Sure, there are myriad potential potholes out there: The Fed (will they hike one more time?), inflation (will it keep coming down?), China’s stagnant growth infecting all corners of the globe, unemployment rising again, bond yields, Russia-Ukraine, etc., etc. But here’s the thing: There are ALWAYS potential potholes when it comes to the market. Those same issues didn’t stop the market from finally flipping the script in the first half of 2023 and turning bullish on the heels of a very rough 2022, and new bull markets almost never up and fizzle after a few months. Share prices are likely to be higher by year’s end, perhaps much higher. That’s worth remembering if the first half of September turns ugly.

So, with investors back for what I believe will be a profitable fall (and beyond), today we add another growth stock to the portfolio in the form of a longtime favorite of Mike Cintolo, who recently added this company back to his Cabot Growth Investor portfolio.

Here it is, with Mike’s latest thoughts.

CrowdStrike (CRWD)

The cybersecurity sector remains in a long-term growth phase that’s only likely to accelerate going forward due to the prevalence of mobile work, work from home and, now, AI, which will be used by both the good and bad guys to step up their efforts. Thus, the group should be fertile ground for new leaders and great earnings growth ahead—yet, as with many tech areas, the wheat has separated from the chaff, with smaller one- or two-product firms getting either swallowed up or going under, while those with broader platforms thrive.

CrowdStrike has long been one of our favorite fundamental names not just in the cybersecurity group, but in the market as a whole, with rapid, reliable growth, booming profits and a continued expansion of its product lineup that have it in line to become another ServiceNow, Salesforce.com or something similar—i.e., a main cog in most big firms’ tech stack.

The firm started years ago with endpoint protection, downloading its software to employees’ cell phones, tablets, laptops and the like, keeping them safe from hacks. But more than that (and part of the company name), CrowdStrike collected trillions of data points daily, and when something of value was spotted, it was integrated into the platform and shared among all clients—getting “smarter” over time.

In fact, that’s one of this company’s big advantages—while large language models will become the norm (and commoditized), CrowdStrike has (in management’s words) a “sustainable data advantage,” which, combined with more than a decade of human analysis, gives its clients best-of-breed outcomes in terms of preventing breaches.

A couple of years ago, there were worries the focus on endpoint security would leave CrowdStrike in the dust, but today it offers a complete collection of high-quality modules, from cloud security to extended detection and response to identity protection to observability and log management and more. In fact, in the recent conference call, the top brass said many of these are IPO-worthy businesses on their own (not that it’s planning on spinning them off); cloud security, identity protection and log protection now bring in $500 million per year in revenue combined, including $200 million from identity protection alone. Indeed, 63% of subscription customers have signed up for at least five modules, while nearly a quarter have seven or more!

Obviously, neither the sector nor CrowdStrike itself is in the first inning of its growth phase, but the runway of growth is long, especially as so many big clients (it closed multiple seven-figure wins in Q3 with Fortune 500 firms worth a total of $20 million in recurring revenue) are still using often dozens of different point security solutions.

Best of all, the firm isn’t just growing, it’s gushing cash and profits to such a degree that it’s “pulling forward” estimates from out years into this year. In Q2, both revenue and annualized recurring revenue (ARR) lifted 37%, but earnings more than doubled and free cash flow here is huge, coming in at $1.70 per share in the first half of the fiscal year (ends next January), totaling a whopping 29% of revenue. And CrowdStrike thinks things will improve further, with a 30% cash flow margin for the full year (north of 30% by Q4) and free cash flow of $3.75 or so for 2023 as a whole.

To be fair, revenue growth is decelerating a bit as the firm grows (ARR is now $2.9 billion), but analysts see the top line expanding north of 30% each of the next two quarters and 28% for 2024, all of which are likely conservative. It’s a great, long-lasting growth story—and after the bear market, the stock is no longer at nosebleed valuations.

Shares fell from a peak near 300 in the bull phase to a low of 92 this January before finally rallying back somewhat, to 160 in early June. CRWD then basically went sideways, gyrating between 140 and 165 (give or take), with some encouraging tightness during the past month. Then came the earnings bump late last week on good volume, bringing shares right back to the top of their rest area. You can buy the stock right here, with the possibility that it goes much higher on any break above the 165 area.

Current Recommendations

Changes Since Last Week: None

No changes today, as most of our stocks have been acting well – in some cases (TSLA, BYDDY, BX, LLY, etc.) very well. The addition of CrowdStrike (CRWD) brings our portfolio to 19 stocks. I plan to ease my restrictions on our 20-stock cap (though not by much), so if all goes well this month, we may well exceed it for the first time in relatively short order. If that happens, it will likely mean the market’s had a good month – better than most Septembers. But, I’m getting ahead of myself. Let’s see what happens.

In the meantime, here’s what’s happening with all our stocks.

Updates

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, was flat this week, with no news. In his latest update, Bruce wrote, “On August 16, Aviva reported first-half earnings of £0.20/share, increasing 10% from a year ago and beating the consensus estimate of £0.19. The company continues to grind forward with healthy performance following its shrink-to-growth turnaround.

“Gross premiums written rose 12% and funds continue to flow into its wealth products. Costs remain controlled with no increase from a year ago on an adjusted basis despite 7% underlying inflation. Operating profits rose 8% and capital strength is sturdy. Aviva generated 26% growth in its funds generation. The company is on track to meet or exceed its targets.

“There was no significant company-specific news in the past week.

“Aviva shares … have 47% upside to our 14 price target. Based on management’s guidance for the 2023 dividend, which we believe is a sustainable base level, the shares offer a generous 8.6% yield. On a combined basis, the dividend and buybacks offer more than a 10% ‘shareholder yield’ to investors.” HOLD

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has trampolined off of support at 96 in mid-August and is now touching 2023 highs around 108! The news that the stock is set to join the S&P 500 after its latest rebalance on September 18 has surely helped, but more likely the upmove is simply a product of this being a Bull Market Stock (Mike’s term) getting going as the buyers have returned the last couple weeks. We’ll see how it behaves now that Wall Street has returned from vacation and the market’s (historically) weakest month has arrived. But for now, the chart looks good, and getting let into the S&P 500 club is a nice stamp of approval. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was the latest earnings implosion. Like most earnings blowups in this god-forsaken Q2 reporting season, the selloff was not deserved. The chipmaker and software provider beat earnings estimates in its fiscal third quarter, but fourth-quarter guidance was merely in line with expectations … which was enough for the sellers to pounce on a stock that was hitting new all-time highs headed into last Thursday’s report. The stock lost 50 points on Friday (the first trading day after the report), or roughly 5.5%. This morning, it’s up slightly, so perhaps the selling will be very short-lived. Regardless, I had AVGO rated as a Buy headed into the report and feel even more strongly about that now after its latest report, where EPS improved 8% year over year on sales growth of 5%. Plus, the company is set to complete its acquisition of VMware (VMW) on October 30, which should only add to revenues down the road. Nearly all of the companies in our portfolio that fell sharply after earnings beats in the last couple months have bounced back after the knee-jerk selling, and AVGO should follow the same pattern. BUY

BYD (BYDDY), originally recommended by Carl Delfeld in his Cabot Explorer advisory, has recovered swiftly since its Chinese economy-induced selloff the first three weeks of August. Since bottoming at 55 two weeks ago, the stock has clawed its way back to 63 – about the midpoint between the low and its late-July highs above 71. The company’s recent earnings data has been the major catalyst behind the rebound: The Chinese EV giant reported a 145% increase in Q2 profits on a 67% surge in revenue, and the company is on track to reach its goal of selling 3 million electric vehicles this year despite China’s sluggish economy, according to the company’s chairman. There’s a whole to like here, so if you didn’t buy when the stock bottomed two weeks ago, you haven’t missed the boat. BUY

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Value Investor advisory, pulled back to 45, which has served as support for the past six weeks. There was no news. We still have a 40% gain on this steady, reliable, dividend-paying stock. BUY

DoubleVerify (DV), originally recommended by Mike Cintolo in Cabot Growth Investor, is down slightly in the last week but still holding above 31 support. There’s been some positive options activity (call buying) on the stock, according to Mike. But our loss on the stock has moved into double-digit territory, so any dip below 31 will likely prompt us to sell. Until then, keep holding. HOLD

DraftKings (DNKG), originally recommended by Mike Cintolo in Cabot Growth Investor, was up about 4% in the last week, recovering nicely since pulling back from highs above 32 in the first half of August. In his latest update, Mike wrote, “DraftKings (DKNG) is far from out of the woods, as there should be resistance up in this area and the recent uptick has come on low volume—but, even so, price is the most important factor, and there’s no question that the stock’s snapback is a good sign. (We’d again note that Penn National’s stock (PENN) is languishing, a good sign that big investors aren’t buying any sea change in the industry.)” BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, just keeps hitting new all-time highs! The stock was up another 1% this week on no news, so the latest uptick was mostly market-driven. In his latest update, Tom wrote, “LLY is on its own schedule. It thrives regardless of what the rest of the market does. I thought this big pharma juggernaut would pull back after the huge 59% spike from early March until the end of June. But it hung tough near the high through July and then soared another 21% in August. LLY is up over 50% YTD and has returned 85% over the past year. … It has two potential mega-blockbuster drugs up for FDA approval this year as well as stellar earnings growth for the next several years.” We now have a 69% gain on the stock in less than six months, as it’s been our best performer in 2023. As I’ve written several times in recent weeks, if you got in early after the recommendation, it’s worth taking a few shares off the table and booking profits (maybe on a quarter position, give or take). Otherwise, it’s still a Buy. BUY

GitLab (GTLB), originally recommended by Tyler Laundon in Cabot Early Opportunities, reports earnings after the bell today. The stock is up about 1.5% in early Tuesday trading, which seems like a good sign. Better yet, shares are up nearly 9% since we last wrote, leaping to 49 from 45 after bottoming at 43 in mid-August. Does Wall Street know something? Analysts are expecting 28% revenue growth and a mere 3-cents-per-share earnings loss, down from -15 cents a share in the same quarter a year ago. And GitLab has a habit of blowing earnings out of the water, having beaten estimates by at least 30% in each of the last four quarters. GitLab provides a source code management (SCM) platform with a host of collaboration, sharing and tracking tools for software developers. The company could be an acquisition target, is an AI play, and trades at less than half its November 2021 highs (125). BUY

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up about 1.5% this week and has been recovering steadily from its early-August pullback. There was no news. Trading closer to the bottom than the top of its summer range, this still looks like an excellent entry point into one of the market’s reliable growth stories. BUY

Neo Performance Materials Inc. (NOPMF), originally recommended by Carl Delfeld in Cabot Explorer, was up 6% this week to hit its highest point since April. This was the second gap up in the stock since the company reported strong earnings in August. Revenue was up slightly, and the company reported a healthy cash position of $126 million. Neo manufactures advanced tech and industrial metals and materials such as magnetic powders and magnets, specialty chemicals, metals, and alloys. BUY

Novo Nordisk (NVO), originally recommended by Carl Delfeld in Cabot Explorer, is hitting new all-time highs yet again! Wegovy, its cash-cow weight-loss drug, just launched in the U.K., pushing Novo’s market cap past LVMH to make it the most valuable publicly traded company in Europe. Carl did flag one potential roadblock in his latest update: “The Biden Administration released a list of drugs that could be subject to Medicare price negotiation. The list included two Novo drugs (Fiasp, NovoLog) that could be impacted as early as 2026.” At the moment, however, investors are laser-focused on Novo’s Wegovy success after the drug was found by a late-stage trial to reduce heart failure symptoms in patients with obesity – hence the all-time highs. We are now up to a 43% gain on the stock, so if you want to book profits on a few shares with the stock at all-time highs, I think that would be a fine idea. But our official rating will stay at Buy. BUY

ServiceNow (NOW), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, had a very good week, rising 4.5%, and is fast approaching 52-week highs above 600. There was no news, though the company seems to be one of many previously high-flying growth titles that got needlessly slammed on perfectly good earnings results in August. Now the market is realizing its mistake, and shares have recovered most of their post-earnings losses. A break to new highs above 603 would be quite bullish. BUY

SI-Bone (SIBN), originally recommended by Tyler Laundon in Cabot Early Opportunities, has been methodically inching its way higher since getting knocked back from 25 to 20 on (good) earnings last month. Now back up to 22, the recovery was enough to convince Tyler to fill out his position in the stock recently and prompted a bullish note from Morgan Stanley. The company is a small-cap MedTech that specializes in treating patients with sacroiliac (SI) joint pain/injuries – specifically, it develops an innovative, patented implant to fuse the SI joint. BUY

Terex (TEX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is in full-on recovery mode, up 7% since we last wrote. There was no news, but the company is (all together now…) rebounding after getting pummeled on earnings, like so many of our stocks. This is why we hung on to most of them – the selling was so obviously overdone in response to encouraging earnings that a bounce-back – and likely a swift one – felt inevitable once the market got back in gear. And that’s what’s happening with Terex, which reported 30% revenue growth and a whopping 120% improvement in earnings per share from a year ago. Thankfully, we’re back in the black on this stock after the recent run-up. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is on a tear again. Shares are up more than 6% since we last wrote and more than 17% since bottoming at 215 in mid-August. The company sold 84,159 Chinese-made vehicles in August, up 9.3% from last August. Sales of the popular Model 3 and Model Y cars improved 30.9% for the month. That was short of the 57.5% year-over-year growth BYD saw in its Dynasty and Ocean hybrids last month, but it was enough growth for Tesla to keep things competitive in China. Also, the company just launched a new Model 3 version in China whose starting price is 12% higher than the existing version – an effort, perhaps, to regain some of the narrowing margins that have resulted from the many price cuts Tesla has made in recent months to keep pace with cheaper competitors, namely BYD. TSLA shares are now up 107% year to date. BUY

Tractor Supply Company (TSCO), originally recommended by Tom Hutchinson in the Dividend Growth Tier of Cabot Dividend Investor, was flat in its first week in the portfolio. There was no news. In his latest update, Tom wrote, “The farm and ranch company is a serious retail player. The company has a proven ability to consistently grow earnings and deliver on stock performance. Few retailers have grown earnings every year for 31 straight years. Last quarter, the company delivered 8.5% EPS growth while average S&P 500 earnings were down over 7%, and down for the third straight quarter. TSCO should be solid in just about any environment with a low beta and many products that are considered staples.” BUY

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, finally broke out of the 43-45 range, rising as high as 47 this past week. In his latest update, Mike wrote, “Uber (UBER) held support near 43 on a few different days and has popped higher—though, like many names (especially growth names), volume has been so-so and shares are back into an area of resistance. Near term, we’re not ruling out more ups and downs, but we’ll stick with our Buy rating, as the action here remains normal, and should lead to good things over time.” BUY

Zillow Group (ZG), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up another 4% this week, and so far, our timing in adding it to the portfolio seems to have been ideal, as a clear bottom appears to have been put in in late August. There was no company-specific news. This is a play on the housing industry’s intermediate- to long-term recovery, which Jerome Powell said has already begun during his comments from Jackson Hole a couple weeks ago. The real catalyst is likely to come next year when the Fed is presumed to start cutting interest rates again, meaning mortgage rates (currently north of 7%) probably won’t stay at two-decade highs for long. BUY

If you have any questions, don’t hesitate to email me at chris@cabotwealth.com. You can also follow me on Twitter, @Cabot_Chris.

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 11, 2023.