We remain in a confirmed bear market, so caution is still appropriate. But the bear may end soon, and when it does, we’ll get back to more aggressive investing.
This week’s recommendation is a healthy company that pays a very large dividend and has a solid future serving one of our country’s strongest energy sectors.
As for the current portfolio, there are no changes.
Details in the issue.
Cabot Stock of the Week Issue: July 11, 2022
We remain in a confirmed bear market, and thus I continue to recommend a cautious stance, which means favoring low-risk stocks and cash. Yet there are technical signs that the bear market may be ending, so if we can just see some strength, we’ll quickly get back to more aggressive investing. Today’s recommendation is a small company with a good story that provides an increasingly valuable service to a major industry. The stock was originally recommended by Tom Hutchinson in Cabot Dividend Investor and here are Tom’s latest thoughts.
ONEOK Inc (OKE)
ONEOK is a large, U.S. midstream energy company specializing in natural gas. It owns one of the nation’s premier natural gas liquids (NGLs) systems connecting NGL supplies in the Rocky Mountains, midcontinent, and Permian regions in key market centers. The company also has an extensive network of natural gas gathering, processing, storage and transportation assets. A whopping 10% of U.S. natural gas production uses ONEOK’s infrastructure.
Here are some things to like about the company and stock.
- Investment-grade rated debt
- 85% of earnings fee-based
- 26 years of stable and growing dividends
- C corporation structure (generates a 1099 and not a K1)
Earnings are resilient because revenues are fee-based; ONEOK simply collects a fee for the services of piping and storing natural gas and NGLs. The company is not reliant on volatile commodity prices to generate revenue. It operates under-long term contracts with reliable customers that have inflation adjustments built in.
Natural gas is a rapidly growing fuel source that is much cleaner burning than oil or coal. That, plus growing supply thanks to fracking, has made NGL by far the fastest growing fossil fuel source. During the pandemic, in one of the worst years ever for the energy industry, ONEOK’s NGL volumes continued to grow. Natural gas transportation volumes also continued to grow in the pandemic.
OKE pays a stellar 6.9% yield and the dividend is secure. The company has grown or maintained the payout for 26 straight years that include recessions and terrible energy environments. It has also grown the dividend at a better than 8% average annual clip for the last five years. It’s a reliable dividend payer and grower.
There’s another advantage, as well. The vast majority of midstream energy companies are structured as Master Limited Partnerships (MLPs) whose distributions can present complicated tax problems including a pain in the neck special K1 form that has to be filed at tax time. ONEOK’s dividends generate a simple 1099 and also qualify for the 15% or 18% maximum tax.
Why buy it now?
OKE has outperformed the midstream energy sector over the long term. In 2021, the stock had a big year and returned 69% (with dividends reinvested). But it has floundered a bit of late. It’s about even YTD but underperforming its peers.
This year’s relative underperformance is for two reasons. One, after the big returns in 2021 the stock was overextended. Two, earnings aren’t growing as strongly as much of the sector because they never decreased much during the pandemic.
OKE has also been knocked back with rest of the energy sector over the past month. Recession fears caused a correction in the sector and OKE tends to trade along with the sector in the short term. OKE has pulled back 17% over the month. But it’s cheap now.
The stock sells at valuations significantly below those of both the overall market and the stock’s own five-year averages. And in the current energy environment, natural gas demand and volumes through its systems are likely to remain strong and growing.
OKE has a defensive business that isn’t nearly as cyclical as the energy sector in general. It’s also a high-yielding stock with an extremely safe dividend, which is rare. Plus, it sells at a cheap valuation. Those qualities could make OKE an ideal place to be over the rest of this year.
|Revenue and Earnings
|Forward P/E: 14.3
|Qtrly Rev Growth
|Qtrly EPS Growth
|Current P/E: 16.9
|Profit Margin (latest qtr) 8.0%
|Debt Ratio: 212%
|One quarter ago
|Two quarters ago
|Dividend Yield: 6.6%
|Three quarters ago
|Price on 7/11/22
|Allison Transmission (ALSN)
|Aris Water Solutions (ARIS)
|Brookfield Infrastructure Partners (BIP)
|Cisco Systems (CSCO)
|CVS Health Corporation (CVS)
|Enphase Energy (ENPH)
|Fanuc Corp. (FANUY)
|Nio Inc. (NIO)
|ON Semiconductor (ON)
|ONEOK Inc (OKE)
|Organon & Co. (OGN)
|Ulta Beauty (ULTA)
Changes Since Last Week’s Update
The addition of OKE to the portfolio brings it up to 16 stocks (of a maximum of 20), and I’m comfortable with that for now, particularly because so many of these stocks are lower risk and/or have great upside potential. If the market weakens from here, we will sell more, but if it strengthens, we will buy some more aggressive growth stocks. Details below.
Allbirds (BIRD), originally recommended by Tyler Laundon in Cabot Early Opportunities, makes footwear from sustainable natural materials and is growing at a good pace. But as with any low-priced stock, its percentage moves can be big, in either direction. Since bottoming at 3.7 in early May, the stock has been building a base, and is currently trading right with its 25- and 50-day moving averages. If you haven’t bought yet, you could buy here. HOLD
Allison Transmission (ALSN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, and featured here two weeks ago, is a midcap ($3.7 billion market cap) manufacturer of vehicle transmissions with about $2.7 billion in revenues. In his update last week, Bruce wrote, “Many investors view this company as a low-margin producer of car and light truck transmissions that is destined for obscurity in an electric vehicle world. However, Allison produces no car and light truck transmissions, instead it focuses on the school bus and Class 6-8 heavy-duty truck categories, where it holds an 80% market share. Its 35% EBITDA margin is sharply higher than its competitors and on-par with many specialty manufacturers. Allison shares have 23% upside to our 48 price target. The stock pays an attractive and sustainable 2.2% dividend yield to help compensate for the wait.” BUY
Aris Water Solutions (ARIS), originally recommended by Tyler Laundon in Cabot Early Opportunities, and featured here last week, is a Houston, Texas-based company that provides water infrastructure and recycling solutions to oil and gas operators in the Permian Basin. Aris helps the industry slash use of fresh and non-potable water by blending technology, integrated infrastructure, and logistics. It helps customers achieve ESG (Environmental, Social and Governance) compliance, something that is increasingly important to oil and gas producers, as well as investors, and its biggest customers are ConocoPhillips (COP), Chevron (CVX), Exxon (XOM), Occidental Petroleum (OXY) and Marathon Oil (MRO), which collectively drive around 70% of revenue. The stock has support at 16 and can be bought here. BUY
Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is a lower-risk technology stock that has become a good value. In his latest update, Tom wrote, “Technology has not been a good place to be this year and AVGO has been hammered. But there is a strong chance that the selling in the technology sector ends sooner than in most other sectors. Many stocks have been oversold, and technology is still where the strong growth is. It’s worth noting that in the recent panic selling, technology fared better than the overall market after leading it lower for most of this year. Things may get worse in the near term, but AVGO should be a lot higher a year from now.” HOLD
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has had a good bounce over the past two weeks, but remains deeply oversold. In his update last week, Tom wrote, “Shares underwent a 3:2 stock split on June 13th. That means shares priced at 60 per share before the split were priced at 40.20 immediately afterwards, but you have 50% more shares. If you had 500 shares before the split, you now have 750 shares. A lower price per share can make the stock attractive to more investors. After outperforming the market all year, BIP was not immune to the heavy selling in the market last month … but BIP has bottomed and recovered somewhat since. It should do well going forward as earnings are very defensive and dependable, and the dividend is safe. It also has built-in inflation protections in its contracts. The reliable payout and defensive characteristics should make this a solid holding in a recession. (This security generates a K1 form at tax time).” HOLD
Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, is one of the portfolio’s biggest losers, and thus a candidate for sale. But I’m holding because Bruce’s methodology is sound, and thus the stock will almost certainly come back, though it will take longer than anticipated. In his update last week, Bruce wrote, “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. Cisco won a reversal of a $2.75 billion payment for damages to Centripetal Networks. In the case, a judge was seen as biased due to his wife’s ownership of 100 shares of Cisco. Separately, the company announced its withdrawal from Russia in response to that country’s invasion of Ukraine. Cisco also said it will exit Belarus. The valuation is attractive at 8.8x EV/EBITDA and 13x earnings, the shares pay a sustainable 3.5% 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. CSCO shares have 51% upside to our 66 price target.” HOLD
CVS Health (CVS), originally recommended by Carl Delfeld in Cabot Explorer, remains above its low of three weeks ago but below its 200-day moving average. In his update last week, Carl wrote, “CVS Health is one of the nation’s leading healthcare companies with almost 10,000 stores and its core markets grow each year even in a weak economy. CVS stock is still a buy representing value since it is trading at just under ten times earnings.” BUY
Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is the world’s leading provider of micro inverters, which are needed to transform DC current from solar cells to AC current that can power a house, commercial building or feed into the power grid. Since 2020, the firm has been in the battery business as well, enabling residential customers to store their solar power. And now Enphase is getting into the EV charger market, with a new product likely in early 2023. In Cabot Growth Investor last week, where Mike doesn’t own the stock (because he’s heavily in cash) but is keeping an eye on it, he wrote, “ENPH has flopped around in recent days (at times getting caught up in the commodity selloff), but the action has been normal and today it made yet another run at resistance. Like so many stocks, volatility is crazy, but the story is great, and the stock remains in position to get moving if the market does.” BUY
Fanuc (FANUY), originally recommended by Carl Delfeld in Cabot Explorer, is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and serve as the “brains” of industrial robots. But the young stock is not heavily supported by institutions yet, so trading is loose. In his update last week, Carl wrote, “Fanuc’s stock offers us a high quality stock that should be firm with its strong balance sheet with $7 billion in cash. Fanuc is a play on a clear robotics growth trend and my six-month price target for this low-risk stock remains 25.” 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 great start for us, as it’s been trending up since early May. In his update last week, Carl wrote, “Shares lost a little ground this week as Covid restrictions persist. CNBC reported yesterday that the number of cities in China that have implemented Covid-related restrictions has doubled. One of the affected areas is a province called Anhui, where Nio has a factory. Nio reported its second-quarter vehicle deliveries late last week, with quarterly vehicle deliveries up 14% year over year and June deliveries increasing 60%. Nio’s ET7 and ET5 models offer battery upgrades with ranges of 621 miles on a single charge – better than Tesla’s Model 3 and Model S.” HOLD
Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Buy Low Opportunities Portfolio, has fallen below its 200-day moving average, but the main trend is still up. In his update last week, Bruce wrote, “Organon was recently spun off from Merck. It specializes in patented women’s healthcare products and biosimilars, and also has a portfolio of mostly off-patent treatments. Organon will produce better internal growth with some boost through smart yet modest-sized acquisitions. It may eventually divest its Established Brands segment. The management and board appear capable, the company produces robust free cash flow, has modestly elevated debt and will pay a reasonable dividend. Investors have ignored the company, but we believe that Organon will produce at least stable and large free cash flows with a reasonable potential for growth. At our initial recommendation, the stock traded at a highly attractive 4x earnings. OGN shares have about 31% upside to our 46 price target. The shares continue to trade at a remarkably low valuation while offering an attractive 3.2% dividend yield.” BUY
Pfizer (PFE), originally recommended by Tyler Laundon in Cabot Early Opportunities, is coming out of a growth trough (due to the 2019 patent expiration of Lyrica) and re-igniting its growth engines courtesy of Covid-related products and transformative M&A. The stock is now above all its moving averages, trending up. Plus it yields 3.0%! BUY
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, lost half its value as it fell from last November’s high to its May low, but since then it’s held up well, even while the market has fallen apart, so odds are very good that the bottom has passed. And the big story remains intact, as Tesla is expanding production capabilities in its factories and looks set to remain the global EV industry leader for the foreseeable future. My thinking these days is that Tesla is well known for its electric cars and thus its future growth in that industry is already discounted by the stock—but Tesla also has huge potential for growth in the global energy market with its solar systems and battery storage systems, and most investors don’t recognize that yet. The company will post its financial results for the second quarter after the market close on Wednesday, July 20. HOLD
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has just dipped under its 200-day moving average but the main trend still looks fine to me so I’m sticking with it. The company has achieved good growth in recent quarters while many retail chains have suffered. HOLD
Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has been building a base at 190 for nearly six months now, but it hasn’t been able to develop an uptrend yet. In his update last week, Tom wrote, “V got knocked back amidst all this recession talk and the downgrading of global growth projections. But it always seems to bottom in the just under 200 per share range and quickly recovers when market selling eases. Visa continues to get a huge benefit from the removal of Covid restrictions globally despite slowing global growth. Earnings blew away expectations with YOY revenue growth of 25% and 30% earnings growth. This stock should be one of the first to reverse course and move higher when the market recovers.” HOLD
The next Cabot Stock of the Week issue will be published on July 18, 2022.
Timothy Lutts is Chairman and Chief Investment Strategist of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.
Under his leadership, Cabot advisories have been honored numerous times by Hulbert Financial Digest, Dow Jones MarketWatch and Timer Digest as the top investment newsletters in the industry.
After working in this business for more than 33 years, Timothy says, “There are 8 things I know.
- The business of investing can provide great rewards to those who work at it and are willing to learn. Those who refuse to learn will lose money.
- To succeed as an investor in growth stocks, it’s best to buy when upside potential dwarfs downside potential, to cut losses short, and to let winners run.
- To succeed as an investor in value stocks, it’s best to buy low and hold patiently, until the stock is fully valued.
- Your greatest enemies are your own emotions and the daily news (generally bad) which distracts you from a long-term focus. Try to ignore them both.
- On the other hand, use your imagination to consider how great companies might evolve, remembering the power of the unforeseeable and the incalculable. When it began renting DVDs by mail, did anyone imagine Netflix could become a leading producer of content? When it began selling books, did anyone imagine Amazon would eventually sell almost everything?
- For over two centuries, the long trend of the markets has been up, reflecting the growth of asset values, and I recommend that you invest in synch with that trend. Your greatest ally is time.
- However, there will always be bull markets and bear markets, and you can use these to your advantage, particularly if you pay close attention to both chart patterns and investor sentiment.
- Lastly, have faith in the ability of intelligent, innovative men and women to adapt, as they always have, and to solve the problems of the future in ways that are unimaginable to people of today. Invest in these people when you can.
Timothy has appeared on numerous podiums as an investing expert, including Bloomberg TV and the World Money Show, led Investor’s Business Daily discussion groups and been interviewed by Dow Jones MarketWatch,TopStockAnalysts.com, VoiceAmerica.com, AOL Finance and numerous other business news organizations.