Stocks continued to retreat last week, prompting us to sell two more stocks today and downgrade another. But the pullback looks pretty normal on the heels of the 17% run-up from mid-June to mid-August and in light of Fed Chair Jerome Powell’s hawkish comments last Friday. And one sector, in particular, has been immune to the recent selling: renewable energy. So today, I’d like to introduce Brendan Coffey, Chief Analyst of our fledgling Sector Xpress Greentech Advisor newsletter and a first-time Stock of the Week contributor. Brendan will tell you about what has been his best-performing clean energy stock of late.
Cabot Stock of the Week Issue: August 29, 2022DOWNLOAD ISSUE PDF
Before I get into the meat of this week’s issue, one housekeeping note: Next Monday is Labor Day, which means our office is closed. Thus, you will receive your Stock of the Week issue next Tuesday, September 6, when the market reopens. Enjoy the long weekend!
As for the market, it was another down week, spurred largely by some hawkish comments from Fed Chair Jerome Powell in Jackson Hole, which resulted in a big sell-off last Friday. All told, the S&P 500 is down about 2% since I last wrote, with the Nasdaq down more like 2.5%. It’s all pretty normal action on the heels of the 17% run-up from mid-June to mid-August, especially given the impending interest rate hikes, still-high inflation, and a seemingly inevitable recession. No need to hit the panic button.
However, a couple of our weaker stocks have been beaten up by the selling the last two weeks, prompting us to sell two more after also selling two last week. That said, one area of clear strength in recent weeks has been renewable energy. And that brings me to Brendan Coffey, Chief Analyst of our Cabot Sector Xpress Greentech Advisor newsletter, and a new contributor to Stock of the Week. Brendan’s focus is on renewable energy, clean technology and ESG (Environment, Social and Governance) stocks, and, after a rough start to the year, many of those have been on the uptick of late, with an assist from Congress.
Today, we add perhaps the best performer from the Greentech Advisor portfolio. Here it is, with Brendan’s latest thoughts on it.
Montauk Renewables, Inc. (MNTK)
Renewable natural gas (RNG) is generally the name for captured methane, a natural gas that is 28 to 36 times more potent a greenhouse gas than carbon dioxide. For power generation, burning it is no different from natural gas. Capturing RNG means displacing fossil fuels that would be extracted from the ground while also redirecting methane that otherwise would be released – the end result is fewer greenhouse gases into the atmosphere. RNG is generated in two broad ways: one is anaerobic digestion – of food waste, wastewater solids, animal manure and landfills; the other is thermal gasification, which is the burning of biomass like leftover crops and woodmass from harvests and crops grown specifically for energy production. A March study by the investment bank Stifel estimates that there are enough dairy and pig farms to increase RNG production 80-fold, and enough landfills to increase production six-fold.
Montauk Renewables (MNTK) generates RNG from landfills in Texas, Oklahoma, Ohio and Pennsylvania and has a plant that collects methane from dairy farms in Idaho. It has capacity for 33,850 MMBtu/day from those and also produces 30.2MW of renewable electricity from RNG at plants in California, Oklahoma and Texas. The company makes money by selling RNG, selling electricity and selling the tax credits granted to renewable gas production. While RNG is in some ways a low-cost business – the methane is going to be emitted into the atmosphere by garbage and cows anyway, so companies just need to capture it – it remains highly dependent on tax credits.
There are two sets of credits that drive the market. The first is the federal Renewable Volume Obligation, which generates Renewable Identification Numbers (RINs) after biofuels are blended with conventional fuels. Those RINs can then be sold for others to use as offsets to their carbon spewing, generating money for the do-gooders like Montauk. RINs vary based on market conditions, mainly on the intricacies of federal tax and credit policy for fuels as well as mandates for blending. Those who use a lot of fuel, such as farmers, generally oppose blending, which they believe raises the prices of their diesel. The other credit that affects the market is the Low Carbon Fuel Standard (LCFS), a California law that has been adopted by Oregon too. This requires the reduction of carbon intensity of fuels by 20% by 2030, encouraging it with tax credits that are higher for RNG collected from livestock farms than from landfills.
The market for RINs has firmed up nicely after a weak first quarter, during which, to Montauk’s credit, it held back on selling its RINs until prices firmed up. They did – Montauk sold 14.4 million RINs at an average of $3.38 a RIN in its latest quarter – and prices are expected to remain strong. In the long term, however, it’s worth remembering prices are subject to political will or lack thereof, having fallen as low at 59 cents a few years ago. Montauk today would be in default on its revolving credit line if the D3 rate falls below 80 cents.
Because of both the general consensus to tackle greenhouse emissions and the tax benefits companies get for renewable generation, RNG is seen as a big growth business – there are both upstarts and established oil and gas companies moving into the space. This is particularly true with farm methane – the capturing, cleaning and selling of the gas from livestock. We like Montauk because even though it has only been public about 18 months, the business’ history in the space goes back 30 years to when RNG was an experimental arm of Getty Oil. For livestock RNG, California is driving the market with its dairy farm LCFS credit and the state’s recent determination that the program is effective at driving down overall emissions. Montauk’s Idaho 18,500-head dairy gas collection effort is designed to feed into the California market. The company is expected to get its carbon intensity score for the plant this quarter, which directly affects the price it gets – the lower the score the better. Approval to sell into the state should come by the start of 2023. Montauk is also operating an experimental swine farm RNG operation in North Carolina which it expects will eventually allow it to enter the market for collecting pig farm methane.
For full-year 2022, Montauk says it will generate between $200 and $220 million in RNG sales – recently hiking the low end of that range due to market strength – plus $17 million to $18.8 million on renewable electricity generation sales. They don’t project RIN sales, but generate about 9 million new ones each quarter, which they may or may not sell quickly. Without counting 2022 RINs, the guidance means Montauk’s revenue will rise 54% this year.
The stock is still a bit of an unknown to many in the market. Montauk only went public in January 2021 at 8.50 and has spent most of the time since in a range between 9 and 13. MNTK recently broke out of the range on enthusiasm generated by the climate-focused aspect of the Inflation Reduction Act (renewable energy is inherently deflationary, whereas fossil fuels are inflationary). The breakout isn’t day traders bidding shares higher – we’ve seen a significant increase in the number of funds accumulating MNTK since the spring. When funds buy, it’s because they expect prices to rise in the long run. If you believe cutting greenhouse gas emissions is here to stay, it’s a growth business.
|Revenue and Earnings
|Forward P/E: 43.7
|Qtrly Rev Growth
|Qtrly EPS Growth
|Current P/E: 76.1
|Profit Margin (latest qtr) 17.5%
|Debt Ratio: 3.43%
|One quarter ago
|Two quarters ago
|Dividend Yield: N/A
|Three quarters ago
|Price on 8/29/22
|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)
|Montauk Renewables, Inc. (MNTK)
|Nio Inc. (NIO)
|ONEOK Inc (OKE)
|Samsara Inc. (IOT)
|Ulta Beauty (ULTA)
Changes Since Last Week’s Update
Allison Transmission (ALSN) Moves from Hold to Sell
CVS Health (CVS) Moves from Buy to Sell
Fanuc (FANUY) Moves from Buy to Hold
Ulta Beauty (ULTA) Moves from Hold to Buy
We have two more “sells” this week, as Allison Transmission (ALSN) and CVS Health (CVS) have taken a turn for the worse amid the recent market weakness. That leaves us with 17 stocks, counting the addition of Montauk Renewables (MNTK). I’ve also downgraded Fanuc (FANUY) to Hold. But it wasn’t all bad news this week: Ulta Beauty (ULTA) posted very strong quarterly numbers last Thursday, prompting a boost in shares and earning an upgrade to Buy. Centrus Energy (LEU) continues to shine as well, racing to new highs. In fact, most of our stocks have fared much better than the market of late.
Here is the latest on all of them.
Allison Transmission (ALSN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, fell slightly last week, though less than the market. However, at 36.6 as of this writing, the stock is now down 12% in the last month, trading at its lowest point in two months, and below its 50- and 200-day moving averages. Having bought the stock at 38, we are now at a small loss. Let’s step aside before it becomes a bigger loss and make room for new stocks down the road that don’t appear to be in free fall. MOVE FROM HOLD TO SELL
Aris Water Solutions (ARIS), originally recommended by Tyler Laundon in Cabot Early Opportunities, was flat again this past week. After dipping from 22 to as low as 15 following underwhelming Q2 results (prompting us to downgrade the stock from Buy to Hold), ARIS rebounded to the mid-17s, where it has stabilized for the past couple weeks – pretty impressive action considering the market is down more than 6% in that time. Could the stock be building a launching pad from which it could make another leap if and when stocks rebound again? We’ll see. HOLD
Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, was down another 1% this week, though the losses have been pretty modest since the stock peaked in mid-August. Overall, AVGO is holding up well heading into earnings this Thursday (September 1). In his latest update, Tom wrote, “Like the rest of the technology sector and the overall market, AVGO got a nice move higher off the June low. The performance of the tech stocks has been encouraging. After leading the overall market lower earlier this year, the sector has been the second-best-performing sector over the last three months, even after a rough week. Broadcom is also very well positioned to benefit in a fundamental way from the 5G rollout and the proliferation of cloud computing. It reports earnings next week. Recent quarterly reports have been excellent and hopefully, the stock gets a boost this time.” BUY
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, just continues to climb, no matter the market conditions. The stock seems hell-bent on topping 52-week highs above 45. We’ll see if it can get there. Here are Tom’s latest thoughts on the stock: “This infrastructure partnership might be the perfect income stock for the current environment. It has highly defensive and recession-resistant earnings with inflation adjustments built into its contracts. The partnership also announced a joint venture with Intel to fund a $30 billion semiconductor fabrication plant in Arizona. It’s certainly a timely investment after the passage of the CHIPS Act and should get some generous government subsidies. Brookfield has been phenomenal at finding great investments over the years that are accretive and boost the stock price. The deal with Brookfield also makes me feel better about Intel. BIP spiked higher on the news. It’s been on a torrid uptrend since mid-July and may be moving to a new high. (This security generates a K-1 form at tax time).” BUY
Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, was back with a vengeance after a down week, hitting new highs above 47 this morning after rising more than 10% in early trading. Why the strength? Probably because Centrus Energy is a nuclear energy provider, and that’s a good thing to be right now as last week Japanese Prime Minister Kishida Fudio lifted his country’s years-old ban on nuclear power plants, permitting idled power plants to be re-started and new, next-generation reactors built. The U.S. has been in an even longer holding pattern on nuclear, though that’s about to change too. As Carl wrote in his update last week, “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. Nuclear power provides more than 50% of U.S. emission-free energy, and more than all other sources such as wind, solar and hydroelectric, combined, according to the Department of Energy. Centrus stock is still trading way off its 52-week high” above 85.
LEU is currently our best performer, as we’re up 72% in the month since we recommended it. Given the volatility over the last couple weeks, it might be worth booking some profits while the going’s good and selling a portion of your original position, at least if you bought right after we recommended the stock. Otherwise, LEU remains a very strong buy. BUY
Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, had a rough week after some slow-but-steady momentum over the previous month and a half. After topping out at 49 it’s now back down to 45 and threatening to bump up against August support. We’ll keep it at hold to see if it bounces—perhaps this was just a bad, market-fueled week. CSCO does remain north of its 50-day moving average, after all. If it has another bad week, we’ll probably sell, given that it’s the biggest loser in our portfolio. For his part, Bruce still likes the stock, and is maintaining a price target of 66, 46% higher than current prices. The 3.3% dividend yield helps too. HOLD
Cleveland-Cliffs (CLF), originally recommended by Clif Droke in his Sector Xpress Gold & Metals Advisor, had a rough first week in the portfolio but bounced back quite nicely last week, which is particularly encouraging in the face of a down week for the market. In his latest update, Clif wrote, “Cleveland Cliffs, North America’s largest flat-rolled steel and iron ore pellet maker, just reported mostly upbeat second-quarter earnings. The company, which enjoys a leadership position in providing steel for the U.S. automotive industry, expects the enormous backlog for vehicles will result in higher steel demand in the coming quarters, which could help push prices for the metal higher. Last week, the company increased spot market basis prices for all carbon steel hot rolled, cold rolled and coated steel products by a minimum of $75 per ton, according to Dow Jones. The higher prices are effective immediately with new orders in North America. With more exposure to the auto industry than any other steelmaker, analysts are speculating that the firm’s spot market price hike could mean that the stalled production rates of recent months are improving.” BUY
CVS Health (CVS), originally recommended by Carl Delfeld in Cabot Explorer, was down with the market this week, and has fallen back below 100 after topping out at 106 in mid-August. Carl doesn’t like what he sees, with the stock or the company. Here’s what he wrote in his latest update: “I’m selling CVS given its potential opioid lawsuit liability and the fact that Amazon has emerged as a stiff competitor to its strategic plan to widen its footprint in healthcare. Amazon already grabbed One Medical and is now moving in on to Signify Health, an $8 billion deal that CVS thought it had in the bag. CVS is still a great company but will either grow a little slower or pay more for acquisitions.”
That all sounds rather ominous, and given that we now have a modest loss in the stock, it makes sense to take Carl’s advice and sell too, opening up another spot in our portfolio. MOVE FROM BUY TO SELL
Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, still looks good, recovering some of its mild losses from the week before. Mike sees the stock’s recent action as normal. Here’s what he wrote in his latest update: “After failing to overcome the round-number resistance area of 300 earlier this month, ENPH has been pulled down a bit by the market, but like many leadership names, the damage has been limited with shares finding support near their 25-day line. (We’d also say a dip after the ‘good news’ of the passage of the green energy bill is classic; the market likes to put the heat on news buyers with sell-the-news reactions.) The firm remains busy on the news front, but most of the releases tell us what we already know, that demand for its microinverters and energy storage solutions (and even EV chargers, a new product that should get much larger going forward) are rising quickly and more and more distributors are expanding their business with them. All in all, we continue to think the stock quacks like a liquid leader, but we’re not taking anything for granted—should ENPH dip below 230 or so (the 50-day line is in the mid-230s and rising), it would likely coincide with a general market crack and likely cause us to pare back. Still, right now, we continue to think optimistically; if you own some, just sit tight and be patient, and if not, we think you can pick up some shares here or on further dips.” BUY
Fanuc (FANUY), originally recommended by Carl Delfeld in Cabot Explorer, has faded a bit of late, falling from a high of 18.55 to 16.24 as of this writing. In his latest update, Carl wrote, “Fanuc shares drifted down one point this week on no news. Fanuc is a sleep-well-at-night stock as 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. FANUY 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.” That all sounds great, but considering how rough the last couple weeks have been and that we’re back down to about break-even on the stock, let’s downgrade to Hold. MOVE FROM BUY TO HOLD
Molson Coors (TAP), originally recommended by Bruce Kaser in the Buy Low Opportunities Portfolio of his Cabot Undervalued Stocks Advisor, has been up-and-down since reporting earnings earlier this month, and is currently trading in a range between about 53 and 56. We’ll see which way it goes once it finally breaks out. In his latest update, Bruce wrote, “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 dipped 1% in the past week and have about 24% 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 9.0x estimated 2022 results, still among the lowest valuations in the consumer staples group and below other brewing companies. The 2.7% dividend yield only adds to the appeal.” BUY
Nio, Inc. (NIO), originally recommended by Carl Delfeld in Cabot Explorer, bounced back slightly this past week after dipping as low as 18. Carl actually sold shares of this Chinese electric vehicle maker earlier this month, citing its “lack of momentum in a growth market” as the reason. We’ll hang on to it for now, since the company accounted for almost 60% of global electric vehicle exports in 2021, and the stock is already more than 70% below its highs. However, with momentum possibly flagging, we downgraded from Buy to Hold last week. We’ll maintain that rating and see where it goes from here. HOLD
ONEOK, Inc. (OKE), originally recommended by Tom Hutchinson in Cabot Dividend Investor, continues to stair-step higher, up from 53 to 64 in the last two months. In his latest update, Tom wrote, “This more volatile and usually better-performing midstream energy company has been moving higher this month after having a lackluster year prior. In fact, OKE is more than 20% above the June low. … It is one of the few stocks that can endure both recession and inflation.” BUY
Qualcomm Inc. (QCOM), originally recommended by Tom Hutchinson in Cabot Dividend Investor, was down 2% in its first week in the Stock of the Week portfolio. Considering the Nasdaq was down nearly 3%, that’s not bad. In his latest update, Tom wrote, “Technology is getting slapped around again recently on renewed fears of higher than anticipated interest rates and inflation. But, despite (last week’s) selloff, technology has been the second-best performing market sector over the last three months after being the worst performer in the earlier part of the year. That behavior insinuates a good likelihood that technology will recover before the overall market after leading it lower.
“Earnings were again spectacular, but the company warned of lower smartphone sales in the second half of the year. The likelihood of slowing phone sales has pressured this stock lower for most of the year. That’s why QCOM is still well off the high. But those slower sales haven’t even materialized yet, and the company still expects 23% year-over-year revenue growth for the rest of the year. The stock sells at 11 times forward earnings, which is cheap for this level of growth.” BUY
Samsara (IOT), originally recommended by Tyler Laundon in Cabot Early Opportunities, was essentially flat this past week, an encouraging sign amidst all the tech selling. Investors are likely in a holding pattern until earnings come out this Wednesday, August 31. We’ll see if the company can keep pace with recent quarters; revenues were up 62% in the latest reported quarter on the heels of 71% top-line growth in fiscal 2022 (which ended in January) and 108% growth in 2021. 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. BUY
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, initiated its long-anticipated 3-for-1 stock split last week. Shares have been mostly unaffected; what was an $850 stock this time last week now trades for $283 – almost exactly one-third its pre-split price. Despite some weakness of late, the stock is still up 38% in the last three months since a late-May bottom, though like the market it seemed to get knocked back every time it threatened to break above its 200-day moving average line. It’s possible any post-split buying people did in the last week was negated by the ongoing tech stock selloff. Still, intermediate-term momentum is still clearly on TSLA’s side – regardless of the share price. BUY
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, reported second-quarter earnings last Thursday and the market mostly liked them. There was a lot to like: both sales and earnings beat analyst estimates, same-store sales posted double-digit growth, and the company increased its market share in the prestige beauty space. Furthermore, the company raised its full-year 2022 guidance. Boosted by easing Covid restrictions, sales grew 16.8% year over year while earnings per share improved nearly 15%.
The strong earnings numbers helped push ULTA shares up 5% in the last week, though shares are still shy of their April highs above 430. In light of the strong quarter, raised full-year guidance and building stock momentum, let’s start buying shares in ULTA again, shall we? MOVE FROM HOLD TO BUY
Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, was down about 3% in the past week, dragged down by the market. We now have a small loss on the stock. 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 tends to move up and down with the fortunes of more cyclical stocks but tends to be among the first to rise when the environment gets friendly. V should actually be higher but is being held back by the threat of a new 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.”
Given that rosy outlook for the company, we’ll hang on to the stock for now. But we may reevaluate if it doesn’t get its act together soon. HOLD
The next Cabot Stock of the Week issue will be published on September 6, 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.