By Michael Cintolo, Vice President of Investments, Cabot Wealth Network
Core & Main (CNM)
We’ve been looking around for an infrastructure stock that meets our growth criteria, as that segment of the economy (after years of overpromising and underdelivering) is now booming and should continue to thanks to both long-term municipal spending and incentives combined with years of underinvestment in a variety of areas: Both non-residential and residential construction has been below trend for many years, while water utilities suffer an average of 16% water loss due to old piping, which now averages 40 years old. Core & Main isn’t a household name, but it’s an increasingly dominant distributor of everything from pipes, valves and fittings (two-thirds of revenue) to storm drainage products to fire protection offerings as well as meters (mainly for water usage); it’s one of only two national players (the firm has 17% of the total market) with about 80% of its products sold into municipal and non-residential applications (with residential making up the rest). Of course, the industries here are growing slowly, but Core & Main is gaining share and, as one of the big players, it’s active on the M&A front, adding small local players to boost market share (it completed seven last year and four so far in 2024 with another two announced—for those that have been with us for a while, it reminds us a bit of SiteOne Landscape on the M&A front). Moreover, the top brass has a very solid longer-term outlook based on what’s very likely to be resilient demand no matter the environment: Between 2023 and 2028, it expects revenues to grow 50% and EBITDA to lift 65%, leaving room for upwards of $1 billion of M&A and $2.5 billion of share buybacks/dividends during that time (market cap is around $12 billion). Translation: While not as rapid as a pure growth stock, Core & Main should see reliable expansion for many years to come. The chart is interesting, too: CNM built a giant post-IPO base from late 2021 through last October, then broke out and staged a massive multi-month rally as sponsorship has boomed (795 funds own shares, up from 542 six months ago). Now the stock has pulled back with the market but in a calm, collected manner—it could rest for a bit longer, but we believe this dip will eventually prove to be the pause that refreshes.
Coupang (CPNG)
Coupang is the dominant online retailer in South Korea. Like Amazon.com, it sells everything from electronics to groceries, performs its own logistics and offers its own video streaming service. Coupang management takes a long-term look at entering new businesses–it spent years and billions of dollars creating its own fulfillment and logistics business from scratch, and that’s now become a growth area with entrepreneurs launching businesses on the Coupang app using the company as their fulfillment partner. Now, management business is focusing on two new projects, the first of which is going more upscale and expanding its markets outside of Korea. In January Coupang acquired Farfetch, a global digital brand for luxury products–mainly apparel but also home goods, jewelry and other accessories; Coupang paid $500 million for it and expects it will take a restructuring charge this period as part of consolidating it into its operations. But management expects to make Farfetch self-funding in a few quarters and to make it the biggest player in the still-fragmented global luxury retailing business. As for the second move, Coupang jumped into Taiwan under the brand Rocket in late 2022 and, while there’s a lot of money flowing into building this business (hundreds of millions of dollars this year alone), management sees that country on track to be profitable in the near future. In 2023, Coupang overall generated $24.4 billion revenue and net income of $0.26 a share, while Wall Street expects to see sales get to $28.7 billion with $0.29 EPS this year—though that could prove conservative following a big price hike for its Wow membership program, which offers customers a variety of benefits. It’s a good international growth story, and the stock is acting great, with a big gap to multi-year highs last month and continued strength despite the wobbly market. Earnings are due out May 7.
Datadog (DDOG)
While you wouldn’t know if you only follow some mega-cap names, the fact is that, after a bear market, most former leaders never really regain their former glory—but the few that do almost always have something unique fundamentally that re-attracts big investors. That’s what we see with Datadog, which looks like the leader in infrastructure monitoring (about $1 billion in annualized recurring revenue), application performance monitoring and log management (continuous collecting and parsing data from a variety of programs to boost performance), the latter two both with a bit over $500 million in recurring revenue. While the details can give you an ice cream headache, the solution here always made sense: With all the varying (and ever more complex) apps and pieces of technology a firm uses these days, it’s vital to make sure everything is working as it should, both on its own and together with other IT assets. As with everyone these days, Datadog is boosting the performance of its platform by integrating AI functionality; its Bits AI is a conversational offering that answers questions expansively and helps users more quickly identify and deal with issues. All in all, demand for Datadog’s wares is only headed higher as technology moves to the cloud and becomes more integrated (11% to 20% annual growth rate for the next few years at least), so while the pandemic boom times are in the past, the future looks likely to produce steady, reliable growth in both sales and free cash flow for years to come: At year-end, the firm had north of 27,000 clients (up nearly 18% from a year ago), and when combined with a mid-teens same-customer growth rate, has been producing sales growth in the mid-20% range for the past few quarters. Meanwhile, free cash flow was up a big 69% for 2023 as a whole (with a 28% margin!)—analysts see the top line lifting a bit more than 20% both this year and next, though our guess is that will prove conservative as the mega-trends underlying this business continue. As for the stock, DDOG changed character after a humongous-volume earnings reaction in November and ran to nearly 140 in February before stalling out—but the pullback hasn’t been bad at all, with shares not far from new high ground as April wound to a close. Note that earnings are due May 7—a big upside reaction would be very bullish.
Southern Copper (SCCO)
Copper prices in the U.S. hit an 11-month high last month in large part because of supply issues that favor the bulls. In China, smelters have agreed to reduce production in reaction to lagging profitability, and this is after supplies were already tight following the closing of a big mine in Panama. Demand from that country is lagging along with its economy, but the resilient outlook in much of Europe and the U.S. has traders thinking the demand outlook should remain steady, if not improved. Responding to the favorable supply/demand outlook are shares of Phoenix-based Southern Copper; it’s one of the world’s largest integrated copper producers and owner of one of the largest proven reserves for the metal with the industry’s lowest cash costs and most extended mine life (it also produces silver, molybdenum and zinc as byproducts through operations in Mexico and Peru). In the fourth quarter of 2023, revenue of $2.3 billion was down 19% from the prior year’s Q4, while earnings of 58 cents a share half the year-ago level. The less-than-stellar results were due to lower volumes for copper, silver and zinc, although it was partly offset by higher molybdenum volumes. And though prices for copper and silver were favorable in the quarter, molybdenum and zinc prices fell—down 13% and 17%, respectively—weighing on results. However, the focus is on the future: The company expects copper production to increase 3% in 2024, while silver production is seen jumping 12% and zinc output is expected to soar 80%. And with prices for all three metals on the rise, continued price strength should result in significantly higher profits for Southern this year. Indeed, an expected shortfall in global copper production, coupled with higher demand for the metal from the booming renewable energy sector, recently prompted a major Wall Street bank to predict copper prices will reach $6.80 a pound by 2025—up a whopping 65% from current prices. Analysts, meanwhile, see positive but subdued growth this year followed by an acceleration in 2025, but those guesses could be trampled if the recent copper price surge (up 24% from its February lows) continues. The stock and some key peers (like Freeport, FCX), broke out decisively in March, moved higher for much of April and then finally shook out a bit, which looks like a buyable retreat.
United Airlines (UAL)
United Airlines needs no introduction, as it’s one of the big airlines that, due to surging demand, relatively controlled costs, higher prices and more flights, has seen earnings and cash flow go bonkers during the past few quarters. And while many have been skeptical these figures will persist, United is seeing a lot of buying after its own Q1 report (as well as some good numbers from peers like Delta) suggest the good times will continue. In the quarter, United’s sales were up 10%, thanks mostly to more flights (9% increase in seat miles flown, just 1% from higher prices), while the loss per share of 15 cents was much better than expected despite the 737Max grounding (Q1 is usually the weakest quarter of the year) yet free cash flow came in around $4.50 per share. Meanwhile, the top brass is sticking to its bullish view for the year, which includes around $10 per share of earnings (including $4 in Q2) with 66 airline deliveries this year and 100 per year between 2025 and 2027, meaningfully boosting capacity over time. To be fair, as with many airlines post-Covid, the balance sheet has been stressed—United has $22.5 billion of net debt (much higher than its market cap), with a few billion in operating leases, too, but with so much free cash flow it’s likely that figure will continue to improve. Obviously, a big slowdown in travel (here or overseas) or a big spike in fuel expenses could change the landscape, but with the economy resilient, it’s a good bet United should continue to see earnings through the roof for many quarters to come. After lagging with the entire peer group, UAL came alive after its Q1 results and has been holding up well despite the tricky market. United has nothing revolutionary, but with a cheap valuation and huge cash flow, we think the stock can head higher.
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About Cabot Wealth Network
This report is published by Cabot Wealth Network which was founded in 1970 by Carlton Lutts, a disciplined investor with an engineering mind who developed a proprietary stock picking system using technical and fundamental analyses.
Since then Cabot Wealth Network, headquartered in Salem, Massachusetts, has grown to become one of the largest and most-trusted independent investment advisory publishers in the country, serving hundreds of thousands of investors across North America and around the world.
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