Cabot Stock of the Month Issue: October 10, 2024

Market Review

The markets have continued to flirt with new highs—pulling back and then moving forward—for the past month.

The Fed’s 50-basis-point rate cut inspired investors, home buyers, and those folks wanting to refinance their homes. The Mortgage Bankers Association reported that refinancing applications rose 20% right after the rate cut!

But last week’s better-than-expected employment numbers—non-farm payrolls growing by 254,000 compared to the 140,000 expected and the falling unemployment rate (to 4.1%)—planted fears that future rate slashes may not be as quick to materialize.

Additionally, wars in Ukraine and the Middle East, as well as the port strike that fortunately, settled quickly (at least temporarily), also pressured the markets.

Style-wise, large-cap growth stocks still lead the market, gaining 22.27% year to date, followed by large-cap value (+13.97%), and mid-cap growth (+12.28%).

Utilities are still outperforming all sectors, up 25.44% so far this year. But Communication Services aren’t far behind, gaining 23.40%, followed by Financial Services (up 19.92%).

But even the lagging sectors are doing well, with Healthcare (up 10.70%), Consumer Discretionary (+9.10%) and Real Estate (+7.84%).

The election is rapidly approaching, and I think once the dust is settled, folks (and investors) will be more focused on their finances and investing strategies.
For now, I’m playing it safe, adding another value stock and taking some profits to shore up our cash reserves for the next leg up in the markets.

Feature Recommendation

This month, I asked Chris Preston for a value stock recommendation. He gave me a couple of ideas but said this one is his favorite (at the moment!). And since the other hat I wear is as a real estate company owner, I thought the timing was right. After all, the housing market is looking better—lower rates are going to improve demand, inventory is increasing, and home price increases are starting to stabilize.

Here is Chris’ recommendation:

Toll Brothers, Inc. (TOL): Investing in a Luxurious Lifestyle

Recommended by Chris Preston, Chief Analyst, Cabot Value Investor

“Six years ago, in the fall of 2018, few new homes were being built in the U.S. From May 2018 to the end of that year, housing starts declined steadily from 1.36 million units to 1.09 million units, a two-year low. The reason was obvious: 30-year mortgage rates had spiked to 4.8%, their highest point since early 2011, as the Federal Reserve—in an effort to combat creeping inflation (sound familiar?)—had raised short-term interest rates from near zero at the end of 2015 to 2.4% by December 2018. New home sales slowed, so fewer new homes were being built.

“So, the Fed pivoted and started slashing rates. By the end of 2019, the federal funds rate was down to 1.5%, the 30-year mortgage rate had dipped to 3.7%, and, sure enough, new homes were being built again, to the tune of 1.55 million units, a post-Great Recession high.

“Then Covid happened, and all trends went out the window. The Fed immediately slashed rates back to near zero, but few houses were being built. Housing starts bottomed at 931,000 in April 2020, because almost no one was looking for a new home in an uncertain new pandemic world.

“We know what happened next. The world began to reopen, people fled cities and moved to more rural areas to get away from the virus, and thanks to government stimulus checks, some (though certainly not all) people had more money to spend, and they used it to take advantage of record-low mortgage rates. (Personal note: My family did just that, closing on a new house one town over from our previous one in Vermont in November 2020. It was my wife’s idea to pounce on a hot market, so I take no credit for our 2.75% 30-year mortgage rate.)

“The housing market was red-hot for nearly two full years, with housing starts doubling from the April 2020 bottom to the April 2022 peak at 1.83 million units built. That, of course, is when it became crystal clear that inflation was not just “transitory,” to borrow a poorly chosen Fed term. It was here to stay.

“By October 2023, mortgage rates had spiked to nearly 8% after the Fed had raised interest rates from near zero to the current 5.25%-5.5% range to bring inflation down from four-decade highs. High mortgage rate fatigue has taken a toll on the housing construction market, as only 1.24 million new homes were built in July, the lowest monthly tally since the early days of Covid.

“That’s about to change.

“The Fed is seemingly hell-bent on slashing interest rates fast. Historically, when the Fed cuts interest rates, homebuilder stocks are among the first to benefit. In the second half of 2019, before Covid arrived: The Fed slashed rates by 100 basis points, and housing starts—at multi-year lows at the end of 2018—spiked to a 13-year high by January 2020.

“And, in 2019 and early 2020 (before Covid hit), during which the Fed cut rates from 2.5% to 1.5%, homebuilder stocks were up 64%, more than double the 30% bump in the S&P 500.

“That’s a fair template for what could happen this time around, especially given that mortgage rates are twice as high as in mid-2019—and there’s theoretically more

“I think we could see similar outperformance in the homebuilders this time around. And now, there’s another potential tailwind, according to an industry source who co-founded a residential development firm that builds single- and multi-family homes in the southeastern U.S.: ‘Homebuilders are attractive to me because they are no longer real estate companies,’ says the source, who preferred to remain anonymous. ‘They are really manufacturing companies now, like a car maker, but with a greater upside on the residual value of their product.’

“‘The big shift to me with the homebuilders,’ he continues, ‘is that they’ve all switched their models to de-risk their balance sheets and let land developers carry inventory for them until it’s ready to go vertical. So, despite their profit margins not expanding, their IRRs (Internal Rate of Return) are materially up under that structure. So, depending on how well they’ve dealt with interest rate buydowns, their balance sheets are healthy, and they are better built to ride out volatility in the home-buying market, similar to how car manufacturers are set up.’

“It’s a nice, sustainable model.

“Sustainable is a good word to associate with an asset you want to invest in for the long term. And when that asset is on the precipice of a major potential catalyst like rate cuts, it makes for an attractive long-term investment.

“Luxury homebuilder Toll Brothers (TOL) isn’t the biggest homebuilder in the U.S. Its $10 billion in revenue last year paled in comparison to the likes of D.R. Horton’s ($35 billion), PulteGroup’s ($16 billion), or Berkshire Hathaway holding Lennar’s ($34 billion). But it’s cheaper—and growing faster than all of them.

“Now, with the Fed finally cutting rates for the first time in four and a half years, the homebuilders are undervalued, trading at 13x forward earnings. Toll Brothers is even cheaper, trading at 10.6x estimates—and growing faster than the average bear. In fiscal 2024, analysts anticipate 18.4% EPS growth on 7.1% revenue growth, both of which would easily top 2023 results (13.6% EPS growth on a 2.7% downturn in revenues).

“Those figures are expected to level off next year—to 3.6% revenue growth and flat EPS. But the company has a knack for topping EPS estimates; it’s done so comfortably in each of the last four quarters, so it’s quite possible those estimates are conservative, especially if the industry-shifting catalysts discussed above are not being factored in yet.

“TOL shares have 19% upside to our 180 price target. Up roughly 10% in the first month since we added it to the portfolio, it’s possible that price target is conservative.

“If the Fed cuts rates more than once this year, I think it could reach our target quite soon. But with rates likely to come down much further in the next 12 months and with a sea change in the way homebuilders do business well underway, there’s a case to be made for Toll Brothers to be a part of any long-term portfolio. BUY”

Toll Brothers was recently upgraded to a Zacks Rank #2 (Buy), based on rising earnings estimates, now at $14.52 per share for the fiscal year ending October 2024, an increase of 17.5%.

Currently, 46 hedge funds are owners of the stock of Toll Brothers. And Bank of America just raised its price target for the company, to 165.

Although housing has had its challenges this year, the luxury housing market (Toll Brothers’ arena; prices from $400,000 to $600,000) is still healthy. And with the company’s wide geographic diversification, its entry into more sustainable products (such as its recent agreement with Sunrun to provide solar power and storage to its homes), and the resurgence of the home building industry, I’d take a bet on this one.

Buy.

About the Analyst: Chris Preston, Cabot Value Investor

Chris Preston is Cabot Wealth Network’s Editor-in-Chief and Chief Analyst of Cabot Stock of the Week and Cabot Value Investor.

Chris joined Cabot in 2015, where he previously served as staff analyst, web editor, and Chief Analyst of Cabot Wealth Daily, our free investment advisory, which in 2019 was named “Best Financial/Investing Newsletter or Ezine” at the SIPA (Specialized Information Publishers Association) Awards, with Chris at the helm.

Prior to joining Cabot, Chris was an analyst and assistant managing editor with Wyatt Investment Research. He has been an investment analyst for the last 13 years and a professional writer/editor for more than 20 years, picking up multiple writing awards along the way. His bylines have appeared in Forbes, The Money Show, Time Magazine, U.S. News and World Report and ESPN.com.

Chris lives in Vermont with his wife, two young kids and their golden retriever, Scout.

Here is our interview:

Nancy: In recent months, the market has continued to march upwards, albeit with a good dose of volatility. Fortunately, large, mid- and small-cap stocks have all joined the surge. And your specialty, value stocks, have also participated, especially large and midcaps. Your portfolio consists mostly of the larger cap stocks. Do you plan to add any small or midcaps to your holdings in the near future?

Chris: Nancy, your timing on this question couldn’t be more perfect! I just added a mid-cap stock—ADT Inc. (ADT) —to the Cabot Value Investor portfolio in our October issue. You know the name ADT—it’s a home/small business security company that’s been around for 150 years … but it only came public in 2018. It hasn’t been a good stock, with shares trading today at exactly half their IPO price (with a market cap of $6.4 billion). But the company is still growing and, most importantly, finally became profitable in the last couple of years, with EPS expected to expand by double digits both this year and next. And yet, the stock trades at less than 10x 2025 EPS estimates. To me, it looks like a bargain.

I plan to add more small-/mid-cap plays to the Value Investor portfolio in the coming months. We actually had another one in the portfolio, Canadian Solar (CSIQ), until recently; it didn’t quite work out. But in general, I’m very high on small caps, which have been underperforming for years and have become woefully undervalued.

Nancy: The sectors you’ve picked are rising nicely, too, but I notice you don’t have any tech stocks in the portfolio. Now that techs are not as highly favored (especially the Magnificent 7), do you plan to add any of those somewhat beaten-down stocks?

Chris: Tech is a bit trickier from a value perspective these days, as the technology sector is the second-most expensive on a forward price-to-earnings basis (behind real estate) and the most expensive by far on a price-to-sales basis. That said, wide swaths of the technology sector have been largely ignored, with the Mag. 7 and artificial intelligence-related plays doing most of the heavy lifting. So, I absolutely could see myself adding a technology position to the Value Investor portfolio very soon. While the advisory is ostensibly a value newsletter, I try and take more of a “growth-at-value-prices” approach. And the growth in technology is too hard to simply ignore.

Nancy: If so, in any particular sub-sectors, such as AI?

Chris: Given the growth in AI, I would never rule that out. But AI has also been red-hot up until recently, so as I mentioned earlier, there’s less true “value” there. Technology sectors that look more attractive at current prices are the semiconductors, which have really been beaten to a pulp the last three months despite continued growth, and cloud computing stocks, which peaked in late 2021 and have never gotten close to those highs since—but have been steadily building momentum in the last year as the bull market has expanded.

Nancy: Which sectors do you believe are undervalued today?

Chris: You already mentioned one group (though it’s not a sector)—small caps. Historically, they tend to outperform large caps—three out of every five years, on average. And yet, they’ve been underperforming large caps by a wide margin for the last five years. Plenty of value there.

I also like Chinese stocks, despite the risk that’s inherent to them. Now that the Chinese government and central bank are taking significant measures to juice China’s sluggish economy—and its stock market specifically—I think we might be seeing the start of a much longer catch-up rally.

As far as pure sectors, I like materials and financials, both of which have lagged for quite some time.

Nancy: With the Fed’s big interest rate cut (with more presumably on the way), most of the shares in Cabot Value Investor should benefit nicely. With those rate cuts in mind, what are your thoughts on REITs—especially mortgage REITs—right now?

Chris: I like REITs, especially mortgage REITs, though we did just add a big-name homebuilder to the portfolio last month, as homebuilders have historically been the first to get a boost from rate cuts. In 2019, the last time the Fed cut rates when it had nothing to do with a global pandemic, homebuilder stocks outpaced the gains in the S&P 500 by more than 2 to 1. I’m hoping for similar outperformance this time around.

Because I just added a homebuilder, for the sake of diversifying, it might be a little while before I add a REIT. But I could see it happening eventually. Any mortgage REITs in particular that you like? You’re the expert!

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Portfolio Updates

Qualcomm Inc. (QCOM) was updated by Tom Hutchinson, Chief Analyst of Cabot Dividend Investor, who noted, “This semiconductor giant has taken some lumps. It sold off in the first week of September but has since recovered. But the stock is still down 28% from the high made in mid-June. Technology is under some pressure as the AI trade has been losing a lot of its luster. AI could weaken further, but the catalyst is not going away. Qualcomm is still very well-positioned ahead of the next wave of AI, which should be in mobile devices. Analysts are forecasting a strong upgrade cycle for smartphones sometime next year and QCOM can easily make up for lost time when it gets hot. BUY”

More than 100 hedge funds are also sold on Qualcomm, primarily due to its AI potential.

A recent report from O’keefe Stevens Advisory stated, “During the quarter, the A.I. rally broadened beyond the obvious players of Nvidia, AMD, and hyperscalers. QUALCOMM, a long-standing investment, is gaining recognition for integrating artificial intelligence into mobile phones. Qualcomm’s A.I. on-device capabilities enable real-time language translation, improved voice recognition, and sophisticated imaging techniques as A.I. becomes more integral to mobile experiences. Qualcomm benefits by leading the market in providing robust, efficient, and versatile A.I. solutions. A.I. could be the first technology advancement in several years to accelerate the smartphone replacement cycle as users desire these advanced capabilities.” Buy

Tom also reviewed Brookfield Infrastructure Partners (BIP), noting, “The good times are rolling as this infrastructure behemoth just hit a new 52-week high this week. After struggling mightily for what seemed like forever, BIP has caught some fire. It was up 12.4% in September and 44% since the middle of April. BIP had been a stellar performer for many years prior to inflation and rising interest rates. But now interest rates are moving significantly lower, and the main threat is a slow economy or recession. BIP should have the right stuff on the right side of the interest rate cycle and with highly defensive earnings. (This security generates a K-1 form at tax time.) BUY”

Motley Fool commented that “Brookfield trades at a very compelling valuation these days, especially compared to other utilities. That low valuation is why Brookfield Infrastructure currently offers such an attractive yield, more appealing than the average utility, which yields around 3% these days. The company also has strong overall growth potential. It expects to grow its FFO at a 10%-plus annual rate in the future. Its significant exposure to the digitalization megatrend (more than 60% of its FFO) is a big factor powering that view. Continue to Buy.

UnitedHealth Group Incorporated (UNH) was also updated by Tom, who said, “The health insurance behemoth had been a dog until this past July. 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 and reaffirmed previous guidance for 2024. The market was happy, and the stock took off. UNH has leveled off over the past couple of months, but it is the first stock in the portfolio to report earnings, which it will do on October 15. Hopefully another good report can get it moving higher again. In the meantime, UNH is a great defensive stock that tends to perform well when the overall market is under pressure. BUY”

As of the second quarter, 114 hedge funds own shares in UNH. In fact, it is the number one healthcare stock owned by hedge funds. Fisher Asset Management has the largest stake, with shares worth more than $1.57 billion. Wall Street likes the stock, which most analysts rate Strong Buy. Continue to Buy.

Tom also reviewed McKesson Corporation (MCK), commenting, “Unfortunately, supply issues with Novo Nordisk’s (NVO) weight-loss drug have been a problem for this pharmaceutical supply chain company. Earnings disappointed with lower-than-expected revenues last quarter and the company cited weight-loss drug supplies that couldn’t keep up with demand as the main cause. A recent report indicates that it could be more of the same for McKesson this quarter. The stock is way down from the high. I’m not sure how this issue will get sorted out in the near term. But it’s a temporary problem and the longer-term prognosis for MCK is excellent. This is a good buying opportunity if you don’t already own the stock. BUY”

Hedge funds like this stock, too, with 70 funds holding shares of McKesson. One owner, Alluvium Global Fund mentioned the company in its Q2 2024 investor letter, saying, “Our estimates of ‘owner’s earnings’ increased by low double digits and our valuation increased by 15%. Although it trades at a premium of 13% to that valuation, we are very much aware of our conservatism and feel comfortable in maintaining our 7.1% position.”

Glenview Capital says “MCK ranks 10th on its list of the best stocks to buy.” Continue to buy.

Michael Brush, Chief Analyst of Cabot Cannabis Investor, commented on the cannabis industry in the wake of the upcoming election, saying, “Because the leadership of both of the largest political parties now uniformly supports cannabis reform, I suggest considering purchases of cannabis stocks on any weakness that happens from here. Consider taking both trading positions and multiyear positions now.

“Curaleaf (CURLF) has expanded its JAMS line of edibles with a product line called JAMS Remix. The company says the new line offers tailored blends of THC, THCV and cannabinoids with ingredients that accelerate the impact of the edibles. Buy”

Curaleaf will report its financial and operating results for the third quarter after market close on November 6, 2024. Analysts expect a loss of -$0.06 on 348.79 million in revenues. Continue to Hold.

Michael also updated his views on Green Thumb (GTBIF), noting, “Blue-chip cannabis company Green Thumb recently opened a store in Jacksonville, Fla., its 20th store in the state. It has 98 stores nationwide. The move is part of a strategy of expanding its presence in a state that will probably launch recreational-use sales in 2025. Florida already allows medical-use sales. Voters in November will decide on allowing legal rec-use sales which would be permitted under a referendum called Amendment 3.

“Green Thumb also announced a $50 million share repurchase plan in September. Green Thumb repurchased 6.5 million shares for $73.3 million under its previous share buyback plan which expired September 10. ‘We continue to believe in the value-creating nature of share buybacks done at attractive prices,’ said CEO Kovler. BUY”

I agree. Buy

Tyler Laundon, Chief Analyst of Cabot Small-Cap Confidential and Cabot Early Opportunities updated his view on TransMedics Group (TMDX), saying, “TransMedics Group stock continues to bounce around between the 134 and 177 levels. Baird recently picked up coverage with an ‘Outperform’ rating and 200 price target. Hold a Quarter.”

At the end of last month, investment firm Vanguard Group acquired an additional 1,068,659 shares of TransMedics Group, bringing its total holdings of the stock to 3,595,059 shares. Let’s continue to hold our remaining shares.

Tyler also updated FTAI Aviation (FTAI), noting, “FTAI continues to benefit from supply chain disruptions in the aerospace engine market. The stock has a beautiful chart, and analysts continue to jump on board with buy ratings (BTIG latest to pick up coverage) and higher price targets. I’m content to keep comments to a minimum here and just let FTAI do its thing. BUY”

As of the latest quarter, 33 hedge funds held stakes in FTAI. And one of the holders, Columbia Acorn Fund had this to say about the company: “FTAI Aviation Ltd. (NASDAQ:FTAI) is an aviation leasing, maintenance and repair company that has built a unique business model, with exposure to the most attractive part of the aerospace aftermarket today—the CFM56 jet engine (sole-sourced engine for the Boeing 737 family and one of the two engine options for the Airbus A320 family). CFM56 engines are the largest engine market, with more than 22,000 engines manufactured and more than 21,000 in service today. FTAI’s strategic partnerships with Lockheed Martin and other engine manufacturers provide a significant moat. The company is well positioned to take advantage of the utilization of engine leasing assets due to strong demand, as airline traffic continues to pick up amid asset scarcity.”

Vanguard Group added 10,363,209 shares of FTAI Aviation Ltd, bringing its total ownership in FTAI to 10.13% of its portfolio. We are up 79% on our shares, so let’s take some money off the table. Sell ½ our shares of FTAI and hold the remaining shares.

Chris Preston made another change to his portfolio, directing his subscribers to sell NOV, Inc. (NOV). He reported, “It’s time to say goodbye to NOV. Simply put, the stock has not performed since my predecessor added it to the Cabot Value Investor portfolio in April 2023. It’s down 13% since then, and while it’s important to give value stocks—especially in this investment climate—plenty of rope, a stock falling for nearly a year and a half is more than enough rope, especially now that oil prices have sunk below $70 a barrel for the first time in more than a year. At less than 16 a share, NOV shares haven’t been this low since June 2023, and it will take a big move just to get back to our entry point, much less our price target of 24. I’m not confident NOV has that in it.

“Let’s sell, stop the bleeding, and open up another spot for a future addition to our Buy Low Opportunities Portfolio. MOVE FROM BUY TO SELL.” I agree. Sell

In his update of Gates Industrial Corp, plc (GTES), Chris commented, “The only recent news came a couple weeks ago when the company announced that it was introducing something called a ‘cooling hose.’ Called the Data Master Cooling Hose, it’s a product intended to enhance performance and cleanliness in data centers. Specifically, it makes for easier assembly, routing and handling in data centers. Demand for ‘cooling solutions’ in data centers has been on the rise, and Gates is meeting that demand with its new hose. We’ll see how the cooling hose impacts the company’s bottom line.

“Whether it’s related or not, GTES shares have picked up steam of late, advancing about 7% in the last three weeks. GTES shares are up more than 60% since they were added to the Cabot Value Investor portfolio – our best-performing position. Yet, trading at less than 11x forward earnings, they still have 14% upside to our 20 price target. BUY”

In the past month, analysts have raised Gates’ 2024 earnings estimates by two cents, to $1.32. Hold for now.

Chris also reviewed Honda Motor Co. (HMC), noting, “After years of declining sales, Honda was rejuvenated in 2023 thanks to hybrids. The Japanese automaker sold 1.3 million cars last year, up 33% from 2022; a quarter of the cars it sold were hybrids, led by its popular CR-V sport utility vehicle (SUV) and Accord mid-size sedan. The CR-V was the best-selling hybrid in the U.S. last year, with 197,317 units sold. The Accord wasn’t far behind, with 96,323 sold. All told, Honda’s hybrid sales nearly tripled in 2023, to 294,000 units.

“So, Honda is making the full pivot to hybrids, with the Civic soon to become the latest addition to its hybrid fleet. Investors have started gravitating more to the companies that sell them. Invariably, those are well-established, big-name car companies made famous by many decades of selling internal combustion engine vehicles; most aren’t ready to fully abandon their roots but want to tap into the surging national (and global) appetite for electric, so they instead are turning to hybrids as a compromise. As a result, these once-stodgy car companies are tapping into new revenue streams, and their share prices are surging accordingly.

“Among the hybrid-rejuvenated, brand-name automakers, Honda offers the best value. Honda just keeps holding in the 31-32 range on no news. The next real catalyst may not come until next month, when the company reports earnings. Although that may depend on the market and its appetite for value stocks, which has been improving of late.

“And there’s certainly deep value here, with HMC shares trading at the bargain-basement values of 6.4x earnings, 0.35x sales, and a mere 53% of book value. It has 40% upside to our 45 price target. The 4.2% dividend yield helps while we wait for Wall Street to catch on to the value. BUY”

Insider Monkey reports that Honda ranks 7th on its list of the best Japanese stocks to buy. I’m going to change my recommendation back to Buy. I’m looking at the long term with this stock.

International Business Machines (IBM) was updated by Carl Delfeld, Chief Analyst for Cabot Explorer, who noted, “International Business Machines (IBM) shares are up 25% over the last three months as the company delivers a strong cash flow driven by software, consulting, and infrastructure, as well as accelerated AI adoption consulting. Buy a Half”

The company is enjoying a resurgence, due to its AI capabilities and potential.

Its watsonx generative AI platform—just a year old—has already rung up in excess of $2 billion in agreements.

The company just opened Europe’s first IBM Quantum Data Center in Ehningen, Germany—the first IBM quantum data center outside the United States and the second of its kind worldwide. It also just finished expanding its Quantum Data Center in Poughkeepsie, NY, which showcases its second deployment of the Quantum Heron processor which offers a 16-fold performance improvement and a 25-fold increase in speed compared to its earlier counterparts.

Analysts have been raising IBM’s earnings estimates, increasing 2024’s EPS forecasts to $10.10 and 2025’s to $10.51. We took some profits last month. Let’s continue to hold our remaining shares for now.

The CDC says that the popular weight-loss drugs, including Ozempic from our Novo Nordisk (NVO), are making a dent in worldwide obesity. A new report from a National Health and Nutrition Examination Survey indicates that the adult obesity rate in the U.S. fell to 40.3% in 2023, from 41.9% in 2020.

Analysts forecast a rise in the weight-loss drug market to $150 billion by the early 2030s—up from $24 billion last year.

Certainly, more competition is coming down the line, but Novo Nordisk has a pretty enviable pipeline.

The company will release its latest earnings on November 6, 2024. Estimates are for EPS of $0.88 (a 20.55% rise over last year) on quarterly revenue of $10.69 billion, up 24.59% from the year-ago period.

Shares have recently lagged, which presents an excellent buying opportunity. Buy

Clif Droke, Chief Analyst of Cabot Turnaround Letter, updated his view on our latest recommendation, Tyson Foods (TSN), saying, “Tyson ran up by an impressive 12 points between mid-June and early August before pulling back in September. Hindsight is 20/20, and I’ll admit I didn’t anticipate the extent of the recent correction. But since the stock has managed to find support at the psychologically significant 200-day line, I’ve decided to maintain our long position.

“The latest bout of selling pressure in Tyson was apparently catalyzed by a ratings downgrade from a major Wall Street institution, which warned of the potential for unfavorable beef costs in the coming months along with ‘a growing market supply of chicken’ that could put downward pressure on poultry prices.

“Frankly speaking, much will depend on how Tyson’s stock behaves in the next few days: if it breaks under the 58 level, I’ll be issuing a sell alert, which should get us out with a still respectable 10%-ish profit. On the other hand, if the stock rallies from here, we’ll stay long but with an eye toward exiting at some point in October. Given the magnitude of the recent pullback, I don’t foresee a new high in TSN anytime soon, so my strategy is to look for an exit opportunity on any meaningful rally that may occur in the coming weeks. In any event, I’ll inform you when that time comes. For now, I’m maintaining a Hold rating in Tyson.”

I agree. Let’s change our rating to Hold for now.

Portfolio

*Aggressive (A), Moderate (M), Conservative (C)

ETF Strategies

Our ETF portfolio continues to outperform, so I want to take some profits off the table. Let’s sell one-third of our shares in First Trust Water ETF (FIW) and Vanguard U.S. Momentum Factor ETF Shares (VFMO).

These ETFs remain on our Watch List:

• Vanguard Small Cap Growth Index Fund (VBK)
• Midcap Growth ETF Vanguard (VOT)

ETF Spotlight

This is a new section for our newsletter. Each month, I’m going to highlight one of our portfolio ETFs, showcasing its largest holdings and past returns so that you can decide if the ETF fits into your investment strategy.

iShares Global Financials ETF (IXG) is a 4-star-rated fund that generally invests at least 80% of its assets in the component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the component securities of its underlying index and may invest up to 20% of its assets in certain futures, options and swap contracts, cash and cash equivalents. The index measures the performance of companies that the index provider deems to be part of the financials sector of the economy and that the index provider believes are important to global markets.

Top 10 Holdings

Returns

It’s Beginning to Look a Lot Like Christmas—for the Homebuilders!

Building is continuing to ramp up in the U.S., with expectations that the construction industry will grow at a CAGR of 4.7% from 2024-2028, to reach $1.53 trillion, according to ResearchandMarkets.com.

The U.S. residential construction market is valued at about $590 billion, and catalysts for growth include affordable housing needs, population growth, urbanization, and changing lifestyle preferences (such as remote working).

Recent surveys depicted in the graphic below show the commercial construction sectors that are poised for growth:

Source: Residentialdesignmagazine.com

The construction sector is expanding due to several factors, including:

1. The aging population and public healthcare challenges are fueling the growth in healthcare facilities.

2. The expansion of digital infrastructure, AI, and robotics are driving technology and data center development.

3. The interest in building sustainable and energy-efficient buildings is gaining steam, especially as government policies are becoming favorable and consumer demand is rising.

4. Government funding will boost infrastructure projects, especially in the transportation and utilities sectors.

5. Lastly, the trends toward modular construction and prefabrication are expanding, forecast to grow from $82 billion to $110 billion by 2025.

Buoyed by declining mortgage rates, the construction industry should be on the mend. And that is already showing up in Toll Brothers’ rising building activity.

I consider this stock of moderate risk. Buy

ETF Portfolio

*Aggressive (A), Moderate (M), Conservative (C)

**Purchase price reflects a 3-for-1 stock split

The next Cabot Money Club Stock of the Month issue will be

published on November 14, 2024.

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