Cabot Stock of the Week Issue: September 9, 2024

The ides of September are upon us, as all three major U.S. indexes were down at least 3% in the first week after Labor Day, though today’s bounce-back is encouraging.

Ordinarily, this week’s Consumer Price Index (CPI) report (Wednesday) and Producer Price Index (PPI) report (Thursday) would be pivotal, but it seems the die is cast in regards to the Fed, which has all but come out and said it’s going to start cutting rates later this month. The inflation numbers could determine whether the FOMC cuts by 25 or 50 basis points next week, especially if both CPI and PPI come in cooler than expected. Best to just focus on the action of the market, however.

As we wrote in this space last week, some September selling was not only likely, but expected. Historically, it lasts the entire month, or at least it has in the last four years. But we’ll see if rate cuts change that calculus. There’s also a fast-approaching presidential election and two major wars still looming as potential market pendulum swingers. But rate cuts should be undeniably bullish in the short term, especially for mortgage and real estate companies. So today … we add a mortgage and real estate company!

It’s a recent recommendation from Mike Cintolo in his Cabot Top Ten Trader newsletter. In fact, it was his Top Pick in last week’s issue. The stock is already up 32% year to date but has pulled back a bit of late, creating a nice entry point for us.

Here it is, with Mike’s latest thoughts.

Rocket Companies (RKT)

Rocket is a Detroit-based fintech that offers a suite of services ranging from mortgage, real estate and personal financial transactions. The company’s flagship business, Rocket Mortgage, has provided over $1.6 trillion in home loans since 1985 (including through its recently introduced Rocket Mortgage App), and its expansion into complementary industries like real estate services and personal lending seeks to “reinvent and enhance” the client experience by leveraging the AI-driven Rocket Logic platform by expediting loan processing, handling client interactions and streamline various tasks traditionally performed by human agents. In recent months, U.S. lenders have become decidedly more “credit cautious,” which is exacerbating a home affordability crisis; U.S. housing affordability remains at historic lows thanks to persistently high mortgage rates and rising home prices (this spring, home purchase applications fell to their lowest levels in over three decades). However, this stock has turned strong as green shoots are starting to appear that could change this dynamic going forward: Mortgage rates have been on the skids, down not just 1.4 percentage points from their 2023 highs but falling nearly half a point just in the past month (thanks in part to the early-August market and currency panic). When you combine that with what is surely massive pent-up demand (especially among first-time and first-time move-up buyers) and a Fed that’s almost surely starting an easing campaign this month, Wall Street is thinking a turn in Rocket’s business is coming.

Indeed, the company says it’s already reaping the benefits of these green shoots, with the addition of 67,000 new clients and around $21 billion in unpaid principal balance among new mortgage servicing rights (MSR) portfolios it recently acquired. Rocket said the loans in these newly acquired MSRs have a higher average interest rate compared to previous portfolios and are opening up a range of products and services for these new clients. Wall Street sees earnings catapulting into next year and, given how profitable the firm has been in the past ($4.11 per share in 2020, $2.26 in 2021), even these estimates could prove conservative.

As for the stock, RKT never entered our recommended buy range last month, but following the recent dip, we’re seeing what we think is a solid entry opportunity—there are never any guarantees, but the first pullback after a breakout and persistent advance is usually a higher-odds entry. Of course, RKT is likely to get pushed and pulled on the rate outlook (last week’s pickup in 10-year yields likely had something to do with the stock’s retreat, while today’s dip helped), but with the trend of rates down, that should be a positive factor over time. We’re OK entering here or on dips with a stop near the 50-day line. BUY

Current Recommendations

Changes Since Last Week:
McKesson Corp. (MCK) Moves from Buy to Sell

Only one casualty from last week’s early-September selling, and that’s McKesson Corp (MCK), which was already having a rough month and got knocked back even further. So, we say goodbye to MCK, keeping our portfolio at 26 stocks with the addition of Rocket Companies (RKT). While there was, of course, some pullback among our holdings during last week’s selling, the damage was mostly limited, with most of our stocks holding fairly steady.

Here’s what’s happening with all our stocks as we enter what is hopefully a more investor-friendly second week of September.

Updates

Alibaba (BABA), originally recommended by Clif Droke in his Cabot Turnaround Letter, gave back the point it had gained the previous week, dipping from 81 to 82. As Clif noted in his Friday update, Alibaba “announced a partnership with payment processors Mastercard and Cardless. The partnership aims to offer a credit card that rewards businesses for cross-border and domestic sourcing purchases. The Alibaba.com Business Edge Credit Card is set to be available for application later this year.” It’s probably a minor catalyst, at least in the short term, though it may have helped BABA from sinking like so many other mega-cap tech stocks last week. BABA remains an undervalued former market darling that looks poised for a turnaround. BUY

AST SpaceMobile (ASTS), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, fell another 8% on Friday as we are nearing the company’s intended September 12 launch date (this Thursday!) for its five BlueBird satellites, which would be the largest communications array ever deployed in low Earth orbit. Technically, the company said “on or after September 12,” which is quite vague. Investors don’t like vague. A huge comedown in the stock price was predictable after ASTS shares had soared from 2 to 38 in just three months, culminating in news of the potentially revolutionary launch. At 26 a share as of this writing, ASTS is still WAY up since May, and even in the last month. However, I do hope you took my advice to sell up to a third of your initial position after the late-August pop. This is a volatile one, but well worth hanging on to – or starting a new position in now that shares have fallen, if you missed the boat the first time around. We’ll see how the launch goes this week – or if it goes. BUY

Aviva plc (AVVIY), originally recommended by Bruce Kaser in Cabot Value Investor, has fallen sharply since topping out above 13.5 at the end of August, dipping below 13 as of this writing. There’s been no news, so the dip is almost certainly related to the market, though an investigation into Aviva’s India branch for tax evasion may not be helping matters. But 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 0.33x sales. The 6.8% dividend yield adds to our total return. BUY

Blackstone Inc. (BX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is down from 142 to 137 in September in lockstep with the down market. Blackstone is a Bull Market Stock (Mike’s apt term), so it tends to outperform in bull markets, which it’s done. But when the market is down like last week, so is BX. It will be back, as long as the bull market doesn’t up and fizzle just yet (unlikely). Also, Blackstone and Vista Equity Partners are in talks to buy Smartsheet (SMAR), a mid-cap company specializing in workplace collaboration software (we use it at Cabot). That’s giving BX shares a decent bounce in early Monday trading. BUY

Broadcom Inc. (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was the latest in a long line of semiconductor/AI-related stocks that reported perfectly fine earnings only to get sold off like they were an abject disaster. Following in the footsteps of Nvidia’s earnings beat and subsequent 14% selloff, Broadcom reported top- and bottom-line beats last Thursday, but the stock sold off more than 10% on Friday, in part because current-quarter guidance was merely “in line” with estimates. The company also reported a net income loss of $1.88 billion, though that included a one-time tax provision of $4.5 billion; adjusted EPS came in at $1.24, ahead of the $1.20 estimated. I’m inclined to leave AVGO at Hold and see how it behaves this week, since it’s very possible the double whammy of a terrible week for semiconductors and a “narrow” earnings beat prompted some knee-jerk overselling. With a big gain on the stock, we can afford to be patient until we know the answer. HOLD

Cava Group (CAVA), originally recommended by Mike Cintolo in Cabot Growth Investor, has been in a steady recovery, rising to 118 after dipping to 110 to close out August. Shares are still shy of their pre-earnings highs near 126 but are well up from the low 80s in the last month. While Mike says there could be more choppiness ahead, he notes that “this is still one of the best growth stories out there: The firm ended Q2 with 341 restaurants, which by comparison is about 10% of what Chipotle has. To be fair, we doubt that Mediterranean cuisine will be as popular as Mexican, but the point is that Cava should have at least a decade of consistent expansion ahead of it, and that doesn’t even include a benefit of improved margins over time. If you really want in, we wouldn’t argue with a nibble here or on dips of a couple of points—but given the stock’s positioning and the market’s latest retrenchment, we’ll stay on Hold for now and see how things develop.” We’ll keep CAVA at Hold for now too. HOLD

Constellation Energy Corporation (CEG), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was down about 3% in its first week in the portfolio, on no news. In his latest update, Tom wrote, “This nuclear power provider and newest portfolio addition is showing strength again and the electricity demand story gains traction. It had pulled back after a big surge and a high in May but recovered in August. The stock is up 49% YTD for a reason. It will likely benefit as much as any other electricity provider from the increased electricity demand. Nuclear offers uninterrupted carbon-free electricity and climate-conscious technology companies are making it a priority.” BUY

Dick’s Sporting Goods (DKS), originally recommended by yours truly in my Cabot Value Investor advisory, reported good-not-great earnings last Wednesday, which was enough to send DKS shares tumbling more than 12%. First, the good: the $4.37 in earnings per share blew analysts’ Q2 estimates of $3.86 out of the water and marked a 55% improvement year over year, while sales ($3.47 billion) narrowly topped estimates ($3.44 billion). Same-store sales growth came in at 4.5%. All of it was enough for the retailer to raise full-year 2024 guidance to a range of $13.55 to $13.90 in EPS (up from $13.35 to $13.75 previously) and same-store sales growth to 2.5% to 3.5% (up from 2-3% previously). However, the midpoint EPS guidance number ($13.73) came in shy of analyst estimates ($13.84), hence the selloff. That seems like an overreaction to a mostly encouraging report. Lingering bad feelings from industry peer Foot Locker’s full-year guidance “miss” (it didn’t raise full-year EPS expectations like analysts had hoped) may have contributed to last week’s selloff.

We’ll see how the stock behaves in the coming days, and whether some kind of bounce-back is in order. Even with the down week, DKS shares are still up 3.5% in the last month. They now have 20% upside to our 250 price target in Cabot Value Investor. BUY

DoorDash Inc. (DASH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, dipped as low as 123 last week – down from highs above 130 in mid-August – but is back up to 126 Monday morning. Aside from launching a new banana pudding flavor (peanut butter and chocolate chunks, yum!) for delivery, there was no major news for the company. 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. In addition to coffee, it offers energy drinks, boba tea, milkshakes, and smoothies. A Cowen analyst recently reiterated a Buy rating on the stock, with a price target of 47. BUY

Eli Lilly and Company (LLY), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, had a rough week, down nearly 6%, though shares of the mega-cap pharmaceutical are still up in the last month. There was no real reason for the drop-off beyond market forces, as ornery hedge funders returning from their summer vacations came for stocks with “meat on the bone” to kick off their usual round of September selling. The only news was a positive: Clinical trials for its once-weekly insulin candidate, efsitora, showed the drug to be just as effective as daily insulin shots. Lilly also has a potential blockbuster Alzheimer’s drug (donanemab) in the works, and its revolutionary weight-loss/diabetes drugs – Mounjaro and Zepbound – continue to fly off the shelves, helping the company crush revenue and earnings estimates yet again in Q2. Dips have been rare for this stock the last two years, so this latest one is well worth buying – and likely short-lived. BUY

GoDaddy Inc. (GDDY), originally recommended by Tyler Laundon in Cabot Early Opportunities, had its first real bad week of the year, falling more than 6% after hitting new all-time highs on basically a weekly basis for the last month. There was no news, so this looks like another “sellers coming for stocks with meat on the bone” situation. I expect it to bounce back. GoDaddy shares have taken off since the web domain registry company unveiled its first AI product, Airo, late last year. TAiro helped the company improve earnings per share by 76% and revenue per user by 5.5% in the latest quarter. Plenty of upside remains, and now the stock has a better entry point. BUY

Intuitive Surgical (ISRG), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, is down about 3% since touching new all-time highs above 492 in late August. There’s been 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, held firm at 84. 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 around 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, has imploded in the last month, plummeting from 630 to 508, so it’s time to say goodbye. I “hired” this pharmaceutical supply chain powerhouse to be a steadying, low-beta force in our portfolio, and it has been anything but. So let’s sell and open up a spot for a stock with more immediate upside. MOVE FROM BUY TO SELL

Microsoft (MSFT), originally recommended by Tyler Laundon in Cabot Early Opportunities, was down about 2.5% as big tech stocks – and the Magnificent Seven in particular – continued their late-summer swoon. But there’s been no reason for the selling other than the AI trend cooling, and MSFT shares are still north of their early-August lows (395). The stock has underperformed in 2024 (+7%), but, given its leadership position in AI and its multi-decade history as perhaps the most resilient big growth stock on the market, MSFT is still a must for any long-term portfolio. And this looks like a good entry point. BUY

Neo Performance Materials (NOPMF), originally recommended by Carl Delfeld in his Cabot Explorer advisory, pulled back slightly after a huge finish to August. A new deal with China to sell its rare earths processing business for $30 million to China’s Shenghe has revived the shares, though Carl noted in his update last week that Neo was “essentially forced” to sell the business to state-owned Shenghe. We’ll keep an eye on where it goes from here, but now, the sale has mostly acted as a tailwind. BUY

Netflix, Inc. (NFLX), originally recommended by Tyler Laundon in Cabot Early Opportunities, is down about 1% since our last issue and has been chopping around for the last three 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, is down about 5.5% after several weeks of inching higher, but the stock is essentially unchanged in the last month. There was some good news for the Danish big pharma company, however, as Carl noted in his latest update: “One of its most promising new products in development is CagriSema, a once-weekly injectable drug that combines semaglutide and cagrilintide, that could be a treatment for both type 2 diabetes and weight loss, which could generate $20.2 billion in revenue by 2030. Demand for Novo’s products is still high with Ozempic sales up 30% to $4.26 billion in the last quarter while Wegovy sales were up 69%.” BUY

Ollie’s Bargain Outlet (OLLI), originally recommended by Mike Cintolo in his Cabot Top Ten Trader advisory, bounced back nicely after dipping to 86 on the heels of a mixed earnings report. 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. That prompted us to downgrade it to Hold last week, but we wanted to give it another week and see how it responded. So far, so good. I still like the upside of this bargain retailer. HOLD

On Holding (ONON), originally recommended by Mike Cintolo in Cabot Growth Investor, pulled back a few points after topping out above 47 in late August. In his latest update, Mike wrote, “ONON had a big wobble earlier this week on no news (we assume some big investor threw shares overboard at the open), though the stock steadied itself right quick and remains in the vicinity of new high ground. In a retail business like this, a lot of it comes down to management and execution—if the top brass pulls the right levers, which they have in recent years, the firm should continue to gain lots of share from firms like Nike and Adidas (in footwear but also apparel and accessories), while margins (which are already at or near the top of the industry) have upside due to scale and efficiencies (a fully-automated facility in Atlanta should come fully online next year). Speaking of the top brass, they see full-year sales growth of 30% or more on a currency-neutral basis, and many analysts see sustainable 20% to 30% growth in 2025 and beyond. We’ll stay on Buy, though further gyrations are to be expected.” We will too. BUY

Sea Limited (SE), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is holding support in the 77-78 area after falling from 83 in late August. Carl put the recent mini-dip in perspective in his latest Explorer update: “Sea Limited (SE) shares pulled back 5% this week but the stock was up nicely in August. During the second quarter, Sea’s Shopee e-commerce platform processed about 2.5 billion orders, representing a 40% increase from the year-ago period. During the second quarter, SeaMoney registered more than 4 million first-time borrowers, which was double the number it added in the same period last year.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, keeps holding around 215, which seems to be its new comfort zone in the absence of any major news. That’s a big improvement from May and June, when TSLA shares lived in the 170s and 180s. Then a narrow beat on second-quarter deliveries sent shares to 2024 highs above 260 – temporarily. The full scope of Q2 results, reported a couple weeks later, disappointed again, and shares sagged all the way back to 191. They’ve since rebounded, and now appear to have set up shop around 215. More meaningful advancement in the shares will likely require an improvement in the company’s slowing sales and narrowing margins. That likely won’t come until the company reports Q3 delivery numbers at the end of the month. BUY

UnitedHealth Group Inc (UNH), originally recommended by Tom Hutchinson in the Dividend Growth Tier of his Cabot Dividend Investor advisory, was down slightly but remains near record highs just under 600 a share. In his latest update, Tom wrote, “What post-Labor Day selloff? UNH just made a new high while the rest of the world is going to Hell in a handbag. UNH soared over 20% since early July. It leveled off for a while but has regained the initiative. Earnings reinvigorated the stock. UnitedHealth beat earnings forecasts as it added more patients and pharmaceutical customers despite a continuing negative effect on profits from the February cyber-attack. UnitedHealth also reaffirmed previous guidance for 2024. It’s well positioned in a slowing economy as a highly defensive stock.” BUY

Viking Holdings (VIK), originally recommended by Mike Cintolo in his “Best Stocks to Buy in August” report, held its ground just below 33, still above its early-August lows. The recent earnings report for this travel company that specializes in luxury river cruises was mixed. 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 32 level to make sure it keeps acting as support. For now, keeping VIK 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.

The next Cabot Stock of the Week issue will be published on September 16, 2024.

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