Investors remain in a buying mood, as last week’s lower-than-expected Consumer Price Index (CPI) number added fuel to the recent rally. With inflation still high and a recession likely upon us, another correction may be in the offing. But for now, it’s time to buy. This week, we add a dirt-cheap mid-cap stock from new Stock of the Week contributor Clif Droke, Chief Analyst of our Cabot SX Gold & Metals Advisor. It’s from an industry that never goes out of fashion and is gaining steam from the shifting automotive landscape.
Cabot Stock of the Week Issue: August 15, 2022DOWNLOAD ISSUE PDF
Rarely have investors been so giddy about 8.5% inflation. Such is the state of the market – and economy – in 2022.
Last week’s lower-than-expected Consumer Price Index (CPI) number was a breath of fresh air on Wall Street a month after inflation topped 9% for the first time in 40 years. The result? Another week of gains for the market, the fifth in a row for the S&P 500 and the seventh out of the last nine weeks. Being mindful of the various caveats—“trash stocks” (my colleague Jacob Mintz’s term for beaten-to-a-pulp growth stocks) are leading the rally, we’re likely in a recession, and, yes, 8.5% inflation is still quite high—the market’s short-term trend is decidedly bullish. And thus, we aren’t doing any selling today.
This week’s addition to the portfolio comes from Clif Droke, Chief Analyst of our relatively new Cabot Sector Xpress Gold & Metals Advisor, and a new contributor to Stock of the Week. Clif’s recommendation, his first in this space, comes from an industry that never truly goes out of style, and one that is rebounding due to improved demand from the auto industry.
Here is the company, and Clif’s latest thoughts on it.
For much of this year, the steel industry has made some major news headlines—and mostly for the wrong reasons.
Steel’s woes began last summer when it became known that China Evergrande Group, formerly China’s largest real estate firm, was facing a debt crisis. The firm defaulted on a major debt payment last December, accelerating the crisis. Companies that do business with Evergrande—including many of China’s construction firms—are at risk of being hurt by Evergrande’s credit woes, which in turn would significantly impact the nation’s massive steel industry.
More recently, a coronavirus-related “hard” lockdown in the major port city of Shanghai this summer crippled construction activity in China and led to steel inventories piling up in the nation’s steelmaking hub of Tangshan and further depressed steel prices.
On top of that, China is enacting strict emissions standards which include steel producers and temporarily lowered production levels for the metal.
Despite these negative factors, they have combined to create a major tailwind for domestic producers like Cleveland-Cliffs (CLF)—one of America’s largest steel producers.
The Ohio-based company specializes in mining iron ore and is the largest flat‑rolled steel and iron ore pellet maker in North America. Additionally, the firm mines the ore from which steel is produced, providing it with more control over its supply chain.
Cliffs expects that a huge pandemic-related global backlog for vehicles will result in higher steel demand in the coming quarters, in turn pushing domestic prices higher.
Indeed, the auto industry is a key driver for steel right now; after reduced vehicle production stemming from the 2020 pandemic, steel demand from automakers is on the rebound. According to Cleveland-Cliffs’ CEO, Lourenco Goncalves, “Starting in the second half of 2022, we expect to get more automotive volume, and with more volume and baseload for our mills, our costs should naturally improve.”
Cliffs is the auto industry’s biggest supplier of the metal, and it’s the company’s most important market. And while construction-related demand for steel has historically outpaced automotive steel demand, that dynamic is expected to change in the coming years as automotive demand is poised to command a much bigger share of both domestic and global steel production. What’s more, the pent-up demand for cars and SUVs in the pandemic’s wake is expected to serve as a catalyst for significantly higher auto sales in the coming years—potentially very good news for Cliffs.
For its part, the company has positioned itself to meet the anticipated demand by making some major investments in capacity expansion. Among them are the recent acquisitions of domestic producer AK Steel (allowing Cliffs to shift from being an industry supplier to an integrated steel mill) and the U.S. assets of multinational steel giant ArcelorMittal (dramatically increasing Cliffs’ flat-rolled steel production capabilities). Cliffs also acquired Nippon Steel Corporation’s remaining interests of 50% in I/N Kote and 40% in I/N Tek to expand its footprint in cold-rolled sheet steel (used mainly for household applications).
On the financial front, Cliffs produced 3.6 million net tons of steel products in Q2 while posting consensus-beating revenue of $6.3 billion—an eye-opening 26% increase from a year ago. Commenting on the sanguine results, Goncalves emphasized the firm’s “industry-leading exposure” to the automotive sector, which he said, “separates us from all other steel companies in the United States.”
He further stated that the backlog for cars, SUVs and trucks has become “enormous,” and that as supply-chain backups continue to be resolved and light vehicle manufacturing catches up with demand, “Cleveland-Cliffs will be the primary beneficiary among all steel companies” in the nation.
Cliffs also generated $633 million in free cash flow on over $1 billion of adjusted EBITDA in Q2, more than double the cash generated in the prior quarter. Management used this cash to repurchase outstanding notes to aggressively pay down debt, achieving the largest debt reduction since embarking on its balance sheet transformation a couple of years ago and extinguishing hundreds of millions in debt.
Management added that Cliffs would make no more “mega investments” in the coming years but would instead focus on its ongoing strategy of enhancing the balance sheet by further paying down debt.
The bullish results and guidance lifted Wall Street’s expectations for the company’s future prospects and, coupled with its continued share repurchase activities, provide strong reasons for expecting Cleveland-Cliffs to reward its shareholders for years to come.
|Revenue and Earnings
|Forward P/E: 2.99
|Qtrly Rev Growth
|Qtrly EPS Growth
|Current P/E: 4.04
|Profit Margin (latest qtr) 15.1%
|Debt Ratio: 66.7%
|One quarter ago
|Two quarters ago
|Dividend Yield: N/A
|Three quarters ago
|Price on 8/15/22
|Allison Transmission (ALSN)
|Aris Water Solutions (ARIS)
|Brookfield Infrastructure Partners (BIP)
|Centrus Energy Corp. (LEU)
|Cisco Systems (CSCO)
|CVS Health Corporation (CVS)
|Enphase Energy (ENPH)
|Fanuc Corp. (FANUY)
|Molson Coors Beverage Company (TAP)
|Nio Inc. (NIO)
|ONEOK Inc (OKE)
|Organon & Co. (OGN)
|Samsara Inc. (IOT)
|Ulta Beauty (ULTA)
Changes Since Last Week’s Update
We have no ratings changes to the portfolio this week, which means with the addition of Cleveland-Cliffs, we are now at full portfolio capacity, 20 stocks. So next week, something will have to go. Let’s hope the market has another good week and makes that a difficult decision. For now, all our stocks are acting well enough to warrant inclusion.
Allbirds (BIRD), originally recommended by Tyler Laundon in Cabot Early Opportunities, reported second-quarter earnings last Monday, and they weren’t great. Inventories only grew by 1%, gross margin plummeted from 56.1% in the same quarter a year ago to 36.1% this year, and the company lowered its 2022 guidance. As a result, the stock was punished, tumbling more than 19% on Tuesday. However, BIRD has since recovered about half those losses, pushing back above 5, meaning we are still in positive territory on the stock. Plus, the company is still growing, with revenues expected to expand by 12.7% this year and earnings per share losses expected to narrow. Thus, despite the disappointing quarter, we’ll keep it at Hold for now. HOLD
Allison Transmission (ALSN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, rebounded nicely last week after a rough prior week when the company’s earnings disappointed (prompting us to downgrade it from Buy to Hold). Perhaps investors deemed the selling (stock fell from 41 to 37) overdone, and shares recovered about half their post-earnings losses, settling at 39 for now. Here’s what Bruce had to say about it in his latest update: “On August 3, Allison reported adjusted earnings of $1.26/share, rising 25% from a year ago but falling 20% short of the $1.57 consensus estimate. Some data services showed a consensus of $1.35, and some services adjusted the reported earnings to $1.35. Either way, the company appears to have fallen short of expectations. Revenues rose 10% but were about 4% below estimates. Adjusted EBITDA rose 7%. Overall, a reasonable quarter for this impressive company.
“Allison reiterated its full-year Adjusted EBITDA and Adjusted Free Cash Flow guidance although it incrementally narrowed the range. We view this as a confidence-builder in the full-year outlook, but beyond year-end, the outlook is murkier.
“The company continues to see healthy demand, particularly in its core North American On-Highway segment (about half of sales) which posted a 13% increase in revenues. All segments but Defense (4% of sales) showed reasonably positive sales growth, as well. Operating profits rose 12%, as higher prices and lower overhead spending more than offset elevated materials costs and higher engineering spending.
“Allison’s cash flow remains healthy although weaker than a year ago as the company’s working capital consumed more cash. The balance sheet is strong. As the company continues to repurchase its shares, the share count continues to decline, down 11% from a year ago.
“Allison shares … have 27% upside to our 48 price target. The stock pays an attractive and sustainable 2.2% dividend yield to help compensate investors.” HOLD
Aris Water Solutions (ARIS), originally recommended by Tyler Laundon in Cabot Early Opportunities, also stabilized after a rough earnings report the week before. After dipping from 22 to as low as 15 following underwhelming Q2 results (like ALSN, prompting us to downgrade the stock from Buy to Hold), ARIS rebounded to the mid-17s last week, leaving us with a small profit on it. It’s possible the market took a second look at some of the positives from the company’s latest quarter—adjusted net income was up 151% from the same quarter a year ago, while adjusted EBITDA improved 21%. Or the stock may have simply ridden the coattails of another strong week for the market. We’ll see how it behaves from here, as Q2 earnings get further in the rear-view mirror. Keeping at Hold. HOLD
Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, continued its steady climb from its early-July bottom, reaching new heights above 550 after dipping as low as 476 six weeks ago. In his latest update, Tom wrote, “The chip and infrastructure software technology stalwart has moved nicely higher since the middle of July, along with the rest of the sector. AVGO is up more than the sector over that time. It doesn’t report earnings until next month. Broadcom stands to benefit from CHIPs Act subsidies. It’s also very well positioned to benefit in a fundamental way from the 5G rollout and the proliferation of cloud computing and should have continued strong earnings.” BUY
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, was basically flat this week after a big move following strong earnings the week before. Here’s what Tom had to say about those earnings and the stock in his latest update: “This defensive infrastructure partnership reported terrific earnings last week. Funds from Operations, the true measure of earnings for an MLP, was up 30% from last year’s quarter and a new record. That’s powerful growth for a highly defensive, dividend-paying company. Results were higher across the board and Brookfield got the most growth from the midstream energy sector, powered by last year’s large pipeline company acquisition. BIP is still well off the high but has been trending consistently higher over the last month. (This security generates a K-1 form at tax time).” BUY
Bumble (BMBL), originally recommended by Mike Cintolo in Cabot Growth Investor, had a rough week after reporting second-quarter earnings last Wednesday. Here’s what Mike had to say about it in his latest update: “Bumble reported earnings last night and simply put, they weren’t great, with sales up 18% and earnings in the red, though interestingly it’s really a tale of two operations: The firm’s international arm (Badoo) is doing poorly, with users down 25% from a year ago and revenue off 14%, while Bumble (U.S.-based) looks just fine, with users rising 31% and revenue up a bit more than that. Still, the top brass did lower the forecast due to Badoo (and currency headwinds), and after trying to find support early today, the stock finished sharply lower, closing below its 50-day line for the first time in three months. Is BMBL toast? It could be, maybe the international drag will just be too much to handle. That said, we’re not quite ready to bury the stock at this point, with the underlying growth of the core business looking good and with the stock back in an area of support. We’ll switch to a Hold rating and will be using a tight leash (another point or so) from here.”
Since (unlike Mike) we only recommended the stock two weeks ago, we’ll keep it at Buy for now, as those who missed the initial recommendation can now buy the stock at a cheaper price. But that rating is tenuous and will depend on how BMBL behaves in the coming week or two. For now … BUY
Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, continues to soar since we added it to the Stock of the Week portfolio three weeks ago, though it was down more than 2% in early Monday trading. Earnings were the latest catalyst. In his latest update, Carl wrote, “Centrus Energy was up another 18% this week after the company announced quarterly earnings of $2.51 per share, easily beating the Zacks Consensus Estimate of $0.80 per share. This compares to earnings of $0.79 per share a year ago. Based in Bethesda, Maryland, Centrus supplies nuclear fuel and services for the global nuclear power industry.
“The nuclear power industry is rapidly changing, with a new generation of advanced reactors under development. Centrus provides an integrated solution for meeting the industry’s engineering, manufacturing and fuel needs. The United States has 94 reactors that generate about 20% of our electricity but we have not built one new plant in the last 25 years. Centrus stock is still trading way off its 52-week high and at just under four times earnings. My original six-month target of 50 looks conservative now.” BUY
Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, continued its slow-but-steady recovery from a massive retreat, allowing it to cling to life in our portfolio. Here are Bruce’s latest thoughts on the company: “Cisco Systems is facing revenue pressure as customers migrate to the cloud and thus need less of Cisco’s equipment and one-stop-shop services. Cisco’s prospects are starting to improve under a relatively new CEO, who is shifting Cisco toward a software and subscription model and is rolling out new products, helped by its strong reputation and entrenched position within its customers’ infrastructure. The company is highly profitable, generates vast cash flow (which it returns to shareholders through dividends and buybacks) and has a very strong balance sheet.
“While Cisco shares’ round-trip from our initial recommendation at 41.32 to 64 and back to around 43 is frustrating, this is not the time to sell the stock. The fundamentals remain reasonably stable and likely to tick back upward, and profits seem likely to improve, as well. The shares will likely come back to life as earnings reports show favorable growth and profit trends, so investors will need some patience. If we have a recession in global tech spending, Cisco would likely feel the downturn but not as severely as other technology companies due to the mission-critical nature of its products and services.
“There was no significant company-specific news in the past week.
“CSCO shares … have 47% upside to our 66 price target. The valuation is attractive at 9.2x EV/EBITDA and 13.3x earnings, the shares pay a sustainable 3.4% dividend yield, the balance sheet is very strong, and Cisco holds a key role in the basic plumbing of technology systems even if its growth rate is only modest.” HOLD
CVS Health (CVS), originally recommended by Carl Delfeld in Cabot Explorer, continued its resurgence on the heels of a very strong Q2 earnings report two weeks ago. In his latest update, Carl wrote: “The company raised its outlook for the year after reporting an 11% increase in second-quarter sales. Retail sales were driven by higher prices and increased prescription sales. Overall revenue came in at $80.6 billion, ahead of average analyst expectations for $76.4 billion, according to FactSet.
“It was reported that CVS plans on submitting a bid for Signify, which through its software and services aims to help clients like health plans, government programs and other employers shift to value-based payment plans. CVS Health is by revenue the 10th-largest company in the world, and its earnings per share has grown 26% each year, compounded, over the past three years.” BUY
Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, more or less held firm last week despite some choppiness. In his latest update, Mike wrote, “ENPH has been quieting down, meeting with a little round-number resistance (at 300) as it digests its massive breakout-and-rally action from late July. It’s looking like nearly a sure thing that the green energy bill will be passed through Congress and signed into law, with a 10-year solar tax credit likely to clear the way for further investment and longer-term planning in the sector. Of course, Enphase’s story is much larger than just this bill—demand for its microinverters and (increasingly) storage solutions are going gangbusters, with U.S. growth excellent and demand from Europe going through the roof as people and companies look for some energy surety. Back to the stock, a bit more digestion would probably be a good thing, and we’re not ruling out a shakeout given the stock’s big run if the market hits a pothole—even so, ENPH is positioned as one of the potential liquid leaders of this move, so if the market rally persists, it should do well. Said another way, there’s risk if the market rally falters, but the upside should be much larger if things go well.” BUY
Fanuc (FANUY), originally recommended by Carl Delfeld in Cabot Explorer, tacked on another point this past week, and is now up 22% in the last month. In his latest update, Carl wrote, “Fanuc is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and also serve as the ‘brains’ of industrial robots. Fanuc is a high-quality stock that should be firm with its strong balance sheet with plenty of cash. Fanuc is a play on a clear industrial robotics growth trend and my six-month price target for this low-risk stock remains 25.” BUY
Molson Coors (TAP), originally recommended by Bruce Kaser in the Buy Low Opportunities Portfolio of his Cabot Undervalued Stocks Advisor, recovered about half its losses from the week before following an underwhelming earnings report. Here are Bruce’s latest thoughts on the stock: “On August 2, the company reported in-line results and guidance, but the shares tumbled as investors worried that slowing industry volumes, and perhaps that Molson’s push into premium brands has come at the wrong moment as consumers start to trade down. The decline in the share price does not diminish our appetite for the stock.
“Revenues rose 2.2% excluding currency changes and adjusted earnings fell 25%. The company reaffirmed its full-year revenue, profit and free cash flow guidance. Prices rose 7% but volumes fell 5%. Volumes for the industry as a whole were weak, so it appears that Molson gained share. The company said that it is roughly balanced between premium brands and lower-priced brands – a mix that is more sensible today as many consumers are trading down due to inflation and the weak economy. Profits slipped due to sharply higher materials, transportation and energy costs.
“TAP shares rose 3% in the past week and have about 25% upside to our 69 price target. The stock remains cheap, particularly on an EV/EBITDA basis, or enterprise value/cash operating profits, where it trades at 9.1x estimated 2022 results, still among the lowest valuations in the consumer staples group and below other brewing companies. The 2.8% dividend yield only adds to the appeal.” BUY
Nio, Inc. (NIO), originally recommended by Carl Delfeld in Cabot Explorer, is one of the top five Chinese EV makers, and the stock is off to a solid start for us, up 16% in two months. Carl actually sold the stock earlier this month, citing its “lack of momentum in a growth market” as the reason. We’ll hang on to it for now, however, as the portfolio is now at full capacity; it could be a casualty in a future issue if the stock stagnates or retreats, which it has yet to do.
Even in selling the stock, Carl sang its praises: “Nio is still worth watching as it is down about 70% from its all-time high and China accounted for almost 60% of global exports of electric vehicles in 2021. In addition, Nio drivers can quickly swap their batteries up to six times per month without leaving their cars. It’s faster than EV charging – taking only three minutes per swap.” BUY
ONEOK, Inc. (OKE), originally recommended by Tom Hutchinson in Cabot Dividend Investor, gapped up from 59 to nearly 65 after a good quarterly report last week before dipping back to 63 this morning. Tom likes what he sees, as he wrote in his latest update: “This midstream energy company reported solid earnings earlier this week that surpassed expectations. Earnings per share rose 21% over the same quarter last year and natural gas demand remains very strong, and volumes through its systems continue to increase. Although OKE has leveled off since late last month, it has been trending generally higher since the middle of June. It also sells at a cheap valuation with a rock-solid dividend. It should have the right stuff over the rest of this year.” BUY
Pfizer (PFE), originally recommended by Tyler Laundon in Cabot Early Opportunities, hasn’t responded well to earnings three weeks ago, with shares falling from 52 to 49 since. That was despite top- and bottom-line earnings beats, with the big pharma company booking $27.7 billion in revenue in the second quarter—up 47% from last year, and the company’s largest quarter on record. Net income was up 78% year over year. What gives? Well, the company merely maintained its 2022 revenue and earnings guidance, which Wall Street didn’t seem to like. Plus, the stock was up more than 11% in the six weeks prior to earnings, so this is likely a case of the good quarter already being baked into the share price.
Last week we downgraded the stock from Buy to Hold, and with virtually no movement since, we’ll keep it there. HOLD
Samsara (IOT), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up slightly in its first week in the Stock of the Week portfolio. As its ticker symbol suggests, Samsara is an Internet of Things (IoT) company that came public late last year and, after a rough start, has righted the ship in the last three months, trading above its 50-day moving average since July 1. The company is growing rapidly, with sales up 108% in fiscal 2021 and another 71% in FY ’22 (Samsara’s fiscal year ends in January).
Samsara has developed a platform of hardware and software for tracking vehicle fleets and other physical assets. These solutions help customers operate more safely and more efficiently, and often pay for themselves through lower accident expenses, less waste and lower fuel and insurance costs. Its target market is valued at roughly $55 billion.
Samsara uses a combination of in-vehicle devices, gateway sensors, video-based AI and a cloud platform—Samsara Connected Operations Cloud—to monitor and manage commercial vehicles and their drivers, worksites, manufacturing equipment, heavy equipment and more.
Earnings aren’t due out until August 31. BUY
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is bumping up against three-month resistance in the 925 range. If it breaks above that level, the recent rally from as low as 628 in late May could still have legs. Still, the stock remains well shy of its November 2021 highs around 1,230, so there’s plenty of upside, which is why we upgraded it back to Buy two weeks ago.
The latest bit of good news for the company is that Elon Musk said it has now produced more than 3 million vehicles, a third of which have been delivered in China. June was the company’s most productive month on record, contributing to the 258,000 cars produced in the second quarter, a 25% improvement from the same quarter a year ago, though a 15% drop from the previous quarter. BUY
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, made a major move higher last week, gapping up from 375 to 403 ahead of second-quarter earnings next week (August 25). That pushed the stock well above our 382 entry price but leaves it still well below its June (425) and April (431) highs. We will keep ULTA at Hold until after earnings, which should hopefully bring more clarity on the stock’s direction. HOLD
Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, remained mostly flat following an impressive earnings report two weeks ago. In his latest update, Tom wrote, “Visa’s earnings knocked it out of the park. It beat expectations on both earnings and revenues, which were up 33% and 19%, respectively. The company continues to benefit from increased global business from the ending of Covid restrictions, despite slower global growth. The stock is normally very quick to recover with the overall market, but it has been more sluggish this time around because of a pending bill in the Senate that will limit credit card fees. We’ll see what the bill looks like and gauge the chances of passage. In the meantime, business is still booming despite inflation and recession.” HOLD
The next Cabot Stock of the Week issue will be published on August 22, 2022.
Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week.
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 more than a decade and a professional writer/editor for nearly 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. He occasionally sleeps.