Cabot Stock of the Month Issue: June 8, 2023

Market Review

The markets have been fairly volatile this past month. The Dow Jones Industrial Average sits at just about the same place we were in last month’s issue. But the S&P 500 has been on a tear, up about 140 points, and the Nasdaq has risen some 50 points due to the momentum in the tech sector, where the average stock is up more than 33% year to date.

Communication Services and Consumer Discretionary stocks have moved along nicely in the past month, on average up 32% and 22%, respectively.

Growth stocks are still outperforming value in all capitalization categories.

The Federal Reserve nudged rates higher in May, the 10^th increase in a little more than a year. They are, of course, trying to stem inflation. The inflation rate dropped a bit in April, to 4.9%, but the jury is still out as to further increases.

Of course, those increases have dampened consumer spending and the mortgage market, with 30-year rates now more than 7.5%. However, the housing market has been resilient, yet slowing. High mortgage rates and low inventory (down 46% from the historical average since 1999) continue to haunt the market, but new builds are still very positive. And consumer confidence, as of the end of May, came in at 102.3 compared to the forecast of 99.0.

Definitely some mixed signals.

And the risk of recession remains high, with the New York Fed recession probability indicator suggesting there is a 68.2% chance of a U.S. recession sometime in the next 12 months.

Here at Cabot, the markets are looking more positive, with more companies holding their recent gains, but we aren’t yet ready to call it a new trend. It’s still a stock picker’s market, and our analysts are elbows-deep in finding you the stocks with the most potential.

Feature Recommendation - NOV, Inc. (NOV): Ready to Prosper as Demand for Oil Rises

The oil industry has had its ups and downs, but the fact remains that demand is still outweighing supply. Energy stocks have declined, and that left me wondering if there were any good bargains in that sector.

Naturally, I turned to Bruce Kaser, Chief Analyst of Cabot Value Investor and Cabot Turnaround Letter, for his opinion. Here is his original recommendation for this energy pick.

“NOV, Inc. (NOV) is the former National Oilwell Varco, a major producer of equipment for the oil and natural gas industries that is out-of-favor but well-positioned to benefit from sustained elevated oil prices.

“This high-quality, mid-cap company ($7.3 billion market cap) appears to be in front of an upshift in demand for drilling equipment even as its shares trade at a modest valuation.

“NOV is a major global supplier of oil and gas drilling equipment, with revenues of $8.5 billion. Based in Houston, Texas, NOV has its roots in the late 1800s, with the current company being the result of both organic growth and numerous mergers. The company is organized into three divisions. Wellbore Technologies (37% of sales) produces equipment to improve drilling results and efficiencies. Completion and Production (35%) focuses on well completion and production equipment. Rig Technologies (28% of sales) makes land and offshore drilling rigs and related equipment as well as gear related to wind towers. All three segments also produce aftermarket parts and provide related services. About 64% of NOV’s revenues are generated outside of the United States, with a customer base that includes independent, major and national oil companies, as well as service providers, with operations in every oil-producing region in the world.

“NOV’s emphasis on proprietary technologies makes it a leader in both hardware, software, and digital innovations, which boosts its relevance to customers and helps maintain its profit margins. Strong economies of scale in manufacturing and distribution as well as research and development further boost its competitive edge. The company’s large installed base helps stabilize its revenues through recurring sales of replacement parts and related services.

“Well aware of the emerging transition to alternative energy sources, NOV has become a leading designer and producer of equipment for offshore wind turbine installation vessels and onshore wind tower construction equipment. Its drilling expertise is also well-placed to meet the growing demand for carbon sequestration and geothermal wells.

“A recovery in demand for drilling equipment appears to be under way, stimulated by the recovery and apparent stability of oil prices. Oil prices are being supported by relatively tight supply, bolstered by OPEC+ production discipline and slowing production growth by publicly traded majors under pressure to return more cash to shareholders. Further constraining oil production is nearly a decade of underinvestment by oil producers.

“Resilient demand for oil is also supporting the commodity’s price. Demand remains robust at around 100 million barrels/day and is likely to continue to increase by about 1 million barrels a day every year into the foreseeable future, following the growth of the global economy.

“NOV is a direct beneficiary of rising demand for oil drilling equipment. Oil at roughly $80/barrel is high enough to encourage producers to drill both onshore and offshore. Demand in the offshore market, usually the last to show growth is NOV’s specialty, and is gradually recovering, reflected in an increasingly tight market for drillships.

“The company’s financial results fell sharply in recent years but are showing signs of recovery. Revenues in 2021 fell to $5.5 billion, down 35% from 2019, while EBITDA of $229 million fell nearly 75% from the 2019 level. However, last year, NOV saw revenues improve to $7.3 billion and EBITDA improve to $679 million. NOV’s backlog continues to tick up and was 8% above year-ago results in the most recent quarter. We see the company generating over $9 billion in revenues and $1.3 billion in EBITDA in three years as oil drilling more fully recovers.

“NOV is well-managed by a respected team of company and industry veterans. Its financial strategy is conservative, reflected in its cash-heavy ($1.1 billion) and low-debt ($1.7 billion, or 1.7x EBITDA) balance sheet. Nearly all of its debt matures in 2029 or later and carries a fixed rate of interest of 3.90% or lower. The company is profitable and generates positive free cash flow. Over time, we anticipate that the company will deploy some of its excess cash into acquisitions and share buybacks.

“Primary risks include the possibility of a sharp and/or prolonged decline in oil and natural gas prices, easing/termination of war-related Russia sanctions and elevated commodity and labor costs. Supply chain issues and weaker onshore gas drilling activity, as well as sizeable inventory increases in advance of expected demand, may impede near-term results.

“NOV shares trade at the low end of their 20-year price range of 10-85 due to investor expectations for an uninspiring future. We see this consensus view as overly pessimistic, given the company’s strong position in an industry with improving conditions, backed by capable company leadership and a conservative balance sheet. NOV shares provide a reasonable 1.35% dividend yield. Our price target for NOV shares is 25, based on a 7.5x EBITDA multiple on our 2025 estimates.

“NOV reported a good quarter, with revenue and profits rising sharply from a year ago. Orders exceeded shipments by 9%. Management commented that weaker North American natural gas prices and ongoing supply chain issues weighed on results but that the global demand picture is improving and ‘driving a steady increase in tendering activity and backlog.’ All-in, encouraging results and any weakness on near-term issues is a good opportunity to accumulate shares.

“Revenues of $2.0 billion rose 27% and were in line with estimates. Net income of $0.32/share compared to a $(0.13) loss a year ago and was about 45% above estimates. Adjusted EBITDA of $195 million rose 89% from a year ago but was 6% shy of estimates. The cash balance declined by about $300 million from year-end mostly due to an inventory build-up in advance of order-filling and some supply-chain-related bloat.

“NOV shares fell due to investor disappointment with the EBITDA results and the company’s weak free cash flow guidance. The shares have 52% upside to our 25 price target. BUY”

In a recent update, Bruce noted, “The price of West Texas Intermediate (WTI) crude oil fell 3% in the past week to $69.38/barrel, while the price of Henry Hub natural gas fell 10% to $2.28/mmBtu (or, million BTU). We have no insight into the direction of crude oil or natural gas prices. Our interest is in prices staying reasonably elevated to encourage continued/higher drilling activity, which seems likely given the current low level of activity across both oil and natural gas segments.

“NOV shares fell 6% in the past week and have 72% upside to our 25 price target. The dividend produces a reasonable 1.4% dividend yield. BUY”

As Bruce said, NOV has an extensive list of proprietary technologies, targeted toward lowering the industry’s marginal cost per barrel. As you can see from the following graphic, its revenues are well diversified.

The following graph depicts the falling supply of oil:

As you can see, OECD crude and product inventories nosedived from record highs in 2021 to the lowest level since 2015. And U.S. crude inventories are ~20% below 5-year averages, which bodes well for a supply shortage/demand increase for the industry.

Accordingly, in the past month, three analysts have increased their earnings estimate for the company, which are currently EPS of $0.30 on revenues of $2.08 billion.

Demand continues to rise for oil; energy stocks have fallen; and NOV commands a current P/E of just 17.21 and a trailing P/E of 12.69. That looks undervalued to me. Moderate.

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About the Analyst: Bruce Kaser, Chief Analyst, Cabot Value Investor and Cabot Turnaround Letter

Bruce Kaser has more than 25 years of value investing experience in managing institutional portfolios, mutual funds, and private client accounts. He has led three successful investment platform turnarounds, co-founded an investment management firm, and was principal of a $3 billion (AUM) employee-owned investment management company.

Previously, he led the event-driven small/midcap strategy for Ironwood Investment Management and was Senior Portfolio Manager with RBC Global Asset Management, where he co-managed the $1 billion value/core equity platform for over a decade. He earned his MBA degree in finance and international business from the University of Chicago and earned a Bachelor of Science in finance, with honors, from Miami University (Ohio).

Bruce specializes in undervalued stocks. And he recently attended the annual conference of Berkshire Hathaway, led by the world-famous value investor, Warren Buffett. I asked him to tell us about his experience there and to bring us up to date on the markets and his current thoughts about investor opportunities.

Nancy: I am anxious to hear about your recent experiences from the Berkshire Hathaway annual meeting. I had the opportunity to go to Omaha for that meeting about 12 or so years ago. Would you share the highlights and strategies that you brought away from the meeting with my subscribers?

Bruce: It was my first visit to the “Woodstock for Capitalists.” Online viewing of Warren and Charlie’s commentary produces many tangible takeaways, but it was the intangibles—obtained only from being there in person—that provided the real value.

One intangible is the immense respect, loyalty, and kindness of Berkshire’s shareholders. I chatted with many over the course of the weekend, and to a person they were kind, friendly and open with their thoughts about the company and its leadership. There was a sense of being part of something rare and historic—that there has been no other person quite like Buffett in American (or world) history and that everyone there was participating in the making of this history.

Another is that my visits to the Borsheims and Nebraska Furniture Mart stores provided some insight into why they are so valuable. The stores are well-stocked with a thoughtful and relevant selection of merchandise, supported by attentive and knowledgeable (but not too pushy) salespeople. My on-site visit revealed differences that make these stores the place to shop – trust and time saved.

Seeing the vast breadth of companies under the BH umbrella in the convention hall was eye-opening. Reading about the companies is one thing—it’s entirely another to walk through a Clayton Home model, buy See’s Candy, stand next to an actual Duracell Formula 1 car, eat a Dairy Queen ice cream bar, and see actual chemical samples from Lubrizol in person. No other company on Earth has such a breadth yet is unified by a common, high-quality culture and ownership.

One other takeaway comes from a chance meeting with Greg Abel, the next CEO after Buffett. In the convention hall, I had a chance to very briefly meet Greg, chat for a few moments and get a quick photo. I fully recognize that first impressions can be misleading and that he certainly was on his best behavior, but my sense was that what I’ve heard through various unofficial channels is true: He is a personable, capable, and low-key leader. It would be impossible for anyone to truly replace the charismatic living legend that is Buffett and the magic that he holds over all Berkshire employees, leaders, and shareholders, but Abel seems like a good choice, partly because he in no way even attempts to replicate Buffett.

We put Berkshire Hathaway shares on our Cabot Turnaround Letter recommended list in April 2020 at the bottom of the pandemic sell-off and it, of course, is still there today given the company’s unique leadership and business traits, and its still-reasonable valuation.

Nancy: Value stocks are again lagging growth stocks. With the market going sideways for the past few months, what are your near- and long-term thoughts on the need for investors to include value in their portfolios?

Bruce: Most of the 12% year-to-date increase in the S&P 500 has come from the seven largest tech stocks in the index, which comprise about 27% of the entire index weight. These stocks have gained, on average, 77% this year. All of the other stocks, the “S&P 493” as it were, have gained, on average, 1%. The top seven stocks are expensive, and several have reached or surpassed their all-time highs. They are vulnerable to a reversal of the artificial intelligence hype, the weight of permanently higher interest rates and the step-down in their long-term earnings growth rates.

In my view, as a value investor, I, of course, believe that there is always a strong need for value stocks to be in investors’ portfolios! More objectively, investors want to be wary of such a high concentration of expensive tech stocks in their S&P 500 index allocation, so having some of the S&P 493 in their portfolios will dampen any mega-cap downturn.

Nancy: I noticed that you recently sold Big Lots (one of my favorite retailers!) stock out of your portfolio. Retailers still seem to have an excess of inventory, a factor that you mentioned in your recent update. Will you share with us your thoughts on the retail sector, and what catalysts might you look for in choosing a retail stock?

Bruce: In retail stocks, I look for companies with a good customer franchise, strong balance sheet, good profits and cash flow, and a capable management team, as well as a meaningfully undervalued stock. It’s not easy to find all of these in one stock, so there is usually some trade-off. Often, a stock has most of these—when another is added, that is the catalyst.

Kohl’s (KSS), for example, had many of the required traits, and then recently hired an exceptional new CEO who looks fully capable of restoring confidence in the company. For Big Lots (BIG), at our recommendation date, it had all of these traits except that their management was average. This weakness, combined with some issues beyond their control, led to a major inventory misstep. The resulting losses, which will likely continue for at least another year, are producing a huge debt burden that now threatens the company. So, even with a strong starting thesis, value-oriented retail stocks can still produce losses.

Across the retail universe today, the environment has become more challenging as consumers pull back due to pressures on their budgets as well as some shifting of their spending to travel and entertainment. The bank deposit stresses earlier this year led to some pullback as well. However, there are so many different types of retailers that investors will want to be selective.

Nancy: The financial sector has seen plenty of pressure in the last couple of months, with the collapse of Silicon Valley Bank, the closure of Signature Bank and the buyout of Credit Suisse by UBS. Do you feel the rout is over, or are there reasons why the worst is yet to come in the banking industry?

Bruce: The weakest of the banks have probably been flushed out. However, bank earnings power is weaker as their previously zero-interest-rate deposit base has become more expensive, and many are stuck with low-yielding bonds which they can’t sell as it would pressure their reported capital levels. Overall, though, banks are generally much stronger than they were in the global financial crisis, so we don’t see another banking crisis, but of course, there are no guarantees. We think Wells Fargo & Company (WFC), Citigroup (C) and Capital One Financial (COF) look particularly attractive today.

Nancy: I see that you don’t have any REITs in your portfolio, yet many are paying some nice dividends today. Please share your outlook for the industry, and tell us if you have any REITs on your Watch List.

Bruce: Yes, many REITs offer attractive dividend yields, although they have lost some appeal in an environment where money market funds now pay 5% interest. I concentrate on capital appreciation opportunities rather than yield-driven stocks, so REITs rarely make it onto my recommendation list. For REITs in general, investors will want to be selective. Commercial real estate is entering a storm that could take years to play out, while some top-quality mall REITs and apartment REITs may be attractive.

Nancy: What are the 3-5 most critical challenges to growth of the stocks in your portfolio right now?

Bruce: A broad challenge is the pace of economic growth, and investors’ outlook for that pace. Currently, there is considerable fear among investors that the economy is headed into a recession. The near-term earnings of many of our stocks would be hit in an economic downturn, so investors have avoided many of our names.

Interestingly, this past Friday, we had a very strong day as the jobs and unemployment data pointed to a resilient economy with less inflation. Our companies are often challenged by internal operating and strategic problems, which they are working to turn around. Also, some of our companies carry a lot of debt, so their interest costs will be going up. Others have large cash surpluses, so rising interest rates will boost their profits.

Portfolio Updates

Bruce Kaser has recently advised his subscribers to cash out their shares of M/I Homes (MHO), as they had met his recently raised 71 price target, saying, “The shares benefitted from being significantly undervalued at our recommendation date along with having strong earnings backed by resilient housing demand. The shares now trade at about 1.0x tangible book value, compared to 0.68x at our recommendation date. Industry conditions remain favorable, but the risk/reward has moved to neutral at best due to the valuation. Sell.”

We sold half of our MHO shares last month; so, let’s Sell the other half and use some of our profits to invest in our newest recommendation.

Qualcomm (QCOM) has had a nice rebound, as Tom Hutchinson, Chief Analyst of Cabot Dividend Investor and Cabot Income Advisor told his subscribers, noting, “The technology sector is on fire. The outlook for many sector stocks greatly improved last Thursday. AI, or artificial intelligence, had been seen as a huge growth engine going forward as companies invest heavily in the technology. Qualcomm (QCOM) is benefiting in a big way.

“Qualcomm, which has the cutting-edge AI chip for mobile devices, has been revitalized after stumbling the past month. Qualcomm describes itself as the “on-device AI leader,” as opposed to Nvidia’s data center chips. The company will surely benefit as investment and profits from AI are now likely to soar sooner than previously expected. Also, smartphone demand is expected to pick up in the third and fourth quarters. HOLD.”

Recently, research firm Canaccord Genuity maintained a Buy rating on Qualcomm with a 152 price target, based on “its diversification growth strategy.” Right now, 21 analysts follow the stock, with 14 Strong Buy and 1 Buy recommendation. The hedge funds are also piling in, with 69 funds holders of some $1.74 billion worth of shares in the company.

I love the comeback in the share price. Let’s continue to Hold.

Devon Energy Corporation (DVN) has, so far, been a disappointment. But the future is beginning to look brighter for the stock. Last month, Stifel maintained its Buy rating on the shares, with a 71 price target. That’s 48% higher than the shares’ current price of around 48.

The shares are also getting some love from hedge funds, 49 of whom own the stock.

Although the share price has been myopic, Devon remains one of the highest dividend payers in the S&P 500, with a dividend yield of 9.64%.

The International Energy Agency (IEA) reports that “demand is growing faster than expected.” The agency increased its demand forecast by 200,000 barrels per day (BPD), boosting its 2023 growth expectations to 2.2 million BPD. That’s an average of 102 million BPD this year. Much of the rise in demand is due to China’s recovery. Additionally, the supply of oil fell by 230,000 BPD in April to an average of 101.1 million BPD. Then add in the Saudis’ recent decision to cut output, and you have a formula for some nice appreciation in the oil stocks. Let’s continue to Hold for now.

Bruce Kaser also updated his view on Citigroup (C), saying, “Citigroup has terminated its plans to sell its Banamex business to a strategic or financial buyer, citing an insufficiently high price. Rather, Citi will pursue an IPO of the business. The institutional banking arm in Mexico will remain part of Citigroup. Citi will complete the separation of Banamex, which also includes 1,300 branches, 12.7 million retail banking customers as well as the mortgage lending, credit card, pensions asset management and commercial banking operations, in late 2024 with the IPO scheduled for 2025.

“While the news is disappointing, it is not unexpected, given the delays and weaker valuations for bank stocks in general this year. Favorably, Citi said it would resume its share buyback this quarter, although the pace will almost certainly be modest at best. Citi’s turnaround remains on track but at a grindingly slow pace.

“When comparing Citi shares with a U.S. 10-year Treasury bond, Citi offers a higher yield and considerably more upside price potential (over 90% according to our work vs. 0% for the Treasury bond). Clearly, the Citi share price and dividend payout carry considerably more risk than the Treasury bond, but at the current valuation, Citi shares would seem to have a remarkably better risk/return trade-off. BUY.”

Citi will report its earnings on July 21. The market is expecting EPS of $1.64 on revenues of $20 billion, estimates that have recently been raised, due to increasing debt and equity underwriting, as well as merger activity.

I’m betting with Warren Buffett on this one; he is the bank’s largest investor (with 55 million shares).

These shares remain very undervalued. I agree with Bruce. Buy.

Michael Brush, Chief Analyst of Cabot Cannabis Investor, who recommended Curaleaf (CURLF), updated his investment thesis, noting, “The biggest gift near-term from Washington, D.C. could be progress on SAFE banking—even though few investors believe this after the debacle caused by the false promises late last year.

“SAFE banking, short for the Secure and Fair Enforcement Act, would allow banks to provide services to cannabis companies. This would be a game-changer. It would allow retailers to stop operating in cash only—which makes them crime targets. It would lower the cost of capital for the sector. And it might even clear the way for institutional money to come into the space.

“Big picture, there would be other favorable consequences, says Boris Jordan, the executive chair of Curaleaf (CURLF). “The minute we get this passed, everything else becomes ten times easier because you have broken the stigma,” he says. Approval would constitute formal recognition of the industry by the President and Congress.

“Curaleaf reported first-quarter revenue of $336.5 million on May 17, a nice increase of 14% year over year but a 2% sequential decline.

“The company reported operating cash flow of $31 million and adjusted EBITDA of $73.2 million. It ended the quarter with cash of $115.8 million against debt of $1.1 billion. The company reported a net loss of $54.4 million vs. a loss of $36.5 million in the first quarter of 2022. The increase was mainly due to price compression. Curaleaf says it will cut capex in half this year to $70 million, supporting its expectation to produce $50 million to $60 million in free cash flow.

“During the quarter, the company opened three new dispensaries in Florida, bringing the total there to 58. It launched recreational use sales in Stamford and Hartford, Connecticut. It completed the acquisition of Deseret Wellness in Utah, adding three stores there to take the total to 15. It ended the quarter with 152 stores nationwide.

“Big picture, the company guided for low-double-digit sales growth this year. It also expects ongoing margin improvement linked to increased automation and the closures of operations in California, Colorado, and Oregon.

“However, the big news may come out of Europe over the next few years. Curaleaf expects robust growth in Europe, where it has been investing heavily ahead of liberalization in the German market. Curaleaf’s Four 20 Pharma has a 15%-20% share in Germany.

“Getting back to the U.S., Curaleaf will benefit this year from the July launch of recreational-use sales in Maryland, where the company has four stores and a big wholesale presence. Curaleaf is also well-positioned in states likely to go legal for recreational use over the next few years, including Florida, Ohio, and Pennsylvania. The company is in the process of applying for licenses in Texas, Alabama, Kentucky, and North Carolina. Buy.”

With its earnings report, Curaleaf revised its full-year outlook, with significant growth expected over the next three years.

These shares are for the long-term; buy for the speculative section of your portfolio.

Tyler Laudon, Chief Analyst of Cabot Early Opportunities and Cabot Small-Cap Opportunities, has issued a Sell recommendation for Huron Consulting (HURN), citing its volatility.

I concur. We’ve made about 14% on our holdings. Let’s take our profits from this one, too. Sell.

Shift4’s (FOUR) prospects were recently updated by Mike Cintolo, Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader, saying, “FOUR has sagged back after testing its 50-day line from below, continuing the base-building effort of the past few weeks. Fundamentally, though, the firm continues to make moves: Recently it announced a technology integration with OpenTable, one of the big restaurant reservation systems, that allows clients to combine booking data with Shift4’s spending data, which should give clients a better view of customers and where to focus marketing (to get repeat customers).

“The obvious risk is that most things retail-related are weak, with fears rising that the Fed’s forever-tightening campaign will eventually crimp consumers; we’d note that big names like Visa (V) and MasterCard (MA) have hit multi-week lows in recent days. Still, the story and numbers (including estimates) for Shift4 remain fantastic, and while there have definitely been some wobbles, FOUR showed solid support in April and has held above that area since. Our thoughts here remain the same: We’ll cut bait if necessary, but with a small position, we advise giving shares a chance to firm up and resume their overall uptrend. HOLD”

I agree. Let’s continue to Hold.

Tyler Laundon updated his view on TransMedics Group (TMDX), commenting, “It hasn’t done great since a $400 million convertible note offering was announced. There is some uncertainty in terms of what a TransMedics Aviation business will look like, what the margins will be, etc. I suspect TMDX stock won’t do a ton until we know more about this new proposed venture. HOLD THREE-QUARTERS”

Tyler has sold one-quarter of his shares. Let’s do the same, and hold the other 75%.

Tom Hutchinson also updated his take on our newest recommendation, Brookfield Infrastructure Partners (BIP), noting, “The infrastructure company is up over 10% this month while the market is slightly negative over the same period. The stock got new life after a sluggish period because Brookfield reported a solid earnings quarter with funds from operations (FFOs) per share growth of 12.5% over last year’s quarter. BIP did pull back a couple of days last week when the overall market sold off. But the stock has since regained its footing and moved back higher. It is still well positioned for a sluggish economy. (This security generates a K-1 form at tax time). BUY”

Brookfield’s dividend yield, at 4.23%, is more than twice the 1.6% dividend yield of the S&P 500. And Wall Street expects that yield to grow by 5% to 9%. The consensus price target for the shares is 43. Buy.

Portfolio

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

ETF Strategies

Currently, First Trust Water ETF (FIW), iShares US Energy (IYE), ALPS Medical Breakthroughs ETF (SBIO), Vanguard Dividend Appreciation Index Fund (VIG), and Communication Services Select Sector SPDR Fund (XLC) are showing positive returns.

I’m taking two ETFs off the Watch List this month, and adding them to our portfolio:

Recommendation #1: Dynamic Semiconductors Invesco ETF (PSI)

5 Stars
High risk
Mid Blend

We may be a little early on this fund, but while the semiconductor industry is set for a drop this year, it’s estimated to grow by 18% in 2024.

The fund generally will invest at least 90% of its total assets in securities that comprise the underlying index, which is composed of common stocks of U.S. semiconductor companies. These companies are engaged principally in the manufacture of semiconductors. The fund is non-diversified. Aggressive.

Top 10 Holdings (50.94% of Total Assets)

Recommendation #2: Adaptive Growth Opportunities ETF (AGOX)

5 Stars
Average-high-risk
Large Blend

This fund’s largest sectors are technology (34.63% of assets), Financials (17.05%), and Industrials (12.81%). It is widely diversified across the rest of the S&P 500 industries.

The manager seeks capital appreciation and primarily utilizes ETFs and equities but may also use fixed-income securities to diversify its asset classes. The fixed-income securities in which the fund will invest will be investment grade and may be of any duration or maturity. Moderate.

Top 10 Holdings (49.04% of Total Assets)

Remaining on the Watch List are:

US Medical Devices Ishares ETF (IHI)
Innovator Ibd Breakout Opportunities ETF (BOUT)
O’s Russell Smallcap Qlty Divd ETF (OUSM)

And I’m adding two more:

GX U.S. Infrastructure Development ETF (PAVE)
Russell Top 200 Ishares ETF (IWL)

Strengthening Demand for Oil Should Boost Services Industry

Globally, oil exploration and production operators have been underinvested industries for a few years, yet many operators are seeing record levels of free cash flow. That’s great for the E&P market, but it’s also proving profitable for the service and equipment providers.

Industry experts are looking forward to a multi-year recovery in oil and gas spending. And that means higher demand for capital equipment.

A recent article on Fortune.com noted that the global oilfield services market size was USD 267.82 billion in 2019 and is projected to reach USD 346.45 billion by 2027, for a CAGR of 6.6%.

North America dominates the market, with a $101.97 billion share. But energy demand is rapidly growing in both Europe and Asia-Pacific

Rising oil assets in the Gulf of Mexico and the North Sea are boosting oilfield services demand. Also, the industry is now seeing increasing shale production, as well as growing production and exploration. And that’s “fueling” demand in oilfield services, as you can see in the graph below.

The graphic below depicts the segments of the oilfield services market.

Since NOV is a leading provider of equipment and technology to the oil and gas industry, the company stands to benefit. It has a diverse product portfolio, is fairly capital-light, and has a strong balance sheet with low debt and a heavy dose of cash.

And let’s not forget that the shares look pretty undervalued. Along with growing demand, NOV looks like it’s well-positioned to break out.

Portfolio

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

The next Cabot Money Club Stock of the Month issue will be published on July 13, 2023.