For the first time in months, stocks actually have a bit of momentum. Is it sustainable? Or another false start? Too early to tell. But it’s a good time to keep adding beaten-down names that are finally showing signs of life. This week’s new recommendation fits the bill, and has been a big winner for Carl Delfeld since he added it to his Cabot Explorer portfolio earlier this month.
Cabot Stock of the Week Issue: July 25, 2022
The second half of 2022 is already looking much better than the first half.
The S&P 500 is up 4.5% in July and 8% since bottoming in mid-June. The Nasdaq has performed even better, up more than 11% since its mid-June nadir. Is the worst of the bear market behind us? Perhaps. But recoveries typically don’t move in a straight line, and the issues that plagued the market in the first half of the year – four-decade-high inflation, soaring interest rates, a (possible) looming recession, war in Europe, etc. – remain. There are bound to be potholes ahead, and this week could be pivotal in determining the market’s direction in the short term, as 30% of the companies in the S&P 500 report earnings, and the Fed will unveil its latest interest rate hike (75 basis points is the expected move, though it could be as high as 100 basis points). That said, with stocks finally showing signs of life, it makes sense to do some buying – especially in solid companies that were overly punished during the first-half selling but are now starting to get their act together.
Today’s recommendation falls into that category. After a rough first half of the year, it’s gotten off its knees and is building some real momentum. More importantly, it’s a leader in an increasingly essential industry that is positioned for major growth in the years ahead.
The stock was originally recommended by Carl Delfeld in his Cabot Explorer advisory and here are Carl’s latest thoughts.
Centrus Energy Corp. (LEU)
Many think that wind and solar are the answer to climate change, but only about 60% of the reduction in CO2 emissions during the past 15 years has come from switching from coal to natural gas.
And while trillions of private and tax dollars were spent on wind and solar projects over the last 20 years, the world’s dependence on fossil fuels only declined from 87% to 84%.
So, if the top risks to the world right now are climate change and geopolitical conflict, the growth of nuclear energy in both America and China is essential.
Nuclear energy is virtually emissions-free energy, takes up very little land, consumes very little fuel, contributes to fuel diversification and the stability of the grid, creates skilled, well-paid jobs and produces very little waste.
It‘s the technology that solves both energy poverty and climate change.
Then there is the important issue of reliability. Nuclear power plants on average operate at full power on 336 out of 365 days per year. By contrast, hydroelectric systems deliver power an average of 138 days per year, wind turbines 127 days per year, and solar electricity only 92 days per year. Even plants powered with coal or natural gas only generate electricity about half the time, for various reasons. Nuclear power is a clear leader in reliability.
In addition, nuclear plants can run for 100 years while solar panels and wind turbines last only about 20 years.
No wonder nuclear power accounts for 70% of France’s electricity mix and 30% for Switzerland, South Korea and Sweden.
Nuclear waste disposal, although a continuing political problem in the U.S., is not any longer a technological problem. More than 90% of spent fuel could be recycled to extend nuclear power production by hundreds of years, and can be stored safely in impenetrable concrete-and-steel dry casks on the grounds of operating reactors, its radiation slowly declining. Price and performance are the key factors and advanced nuclear energy can be cheaper than coal and more dependable than solar or wind.
There are significant American beachheads to support and validate the expansion of nuclear energy in America. For example, for Duke Energy (DUK), 40% of the electricity the company produces comes from nuclear power. America has 94 reactors that generate about 20% of our electricity but we have not built one new plant in the last 25 years.
Centrus Energy (LEU), based in Bethesda, Maryland, supplies nuclear fuel and services for the nuclear power industry in the United States, Japan, Belgium and several other countries.
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. Drawing on decades of experience, Centrus can help with the design and manufacture of critical components as well as the design and licensing of facilities to produce new fuels.
One near-term catalyst for this stock is that the Biden administration is pushing lawmakers to support a $4.3 billion plan to buy enriched uranium directly from domestic producers to wean the U.S. off Russian imports of the nuclear-reactor fuel. Russia accounts for about 23% of the enriched uranium needed to power U.S. commercial nuclear reactors.
Energy Department officials are making the case that any interruption in the supply of enriched Russian uranium could cause operational disruptions at commercial nuclear reactors.
The proposal aims to spur development of more domestic enrichment and other steps needed to turn uranium into reactor fuel. This would create a government buyer directly purchasing enriched uranium, including the type used in a new breed of advanced reactors now under development.
Right now, America has only one remaining commercial enrichment facility – a New Mexico plant owned by Urenco Ltd., a British-German-Dutch consortium. Energy Secretary Jennifer Granholm has called the U.S. reliance on Russian imports a clear vulnerability. Other backers of expanding U.S. enrichment capabilities include Senator John Barrasso, a Wyoming Republican who serves as the top GOP member of the Energy and Natural Resources Committee.
Centrus Energy is building an enrichment facility in Ohio and would be very likely to benefit, especially if this funding moves forward. In addition, the stock is trading at about 27 per share, way off its 52-week high of 88 and at just 2.7 times trailing earnings (and less than 8x forward earnings).
Centrus also has an operating margin of 23%. I believe downside risk is low and upside significant, and I have a six-month target of 50.
|Revenue and Earnings
|Forward P/E: 2.70
|Qtrly Rev Growth
|Qtrly EPS Growth
|Current P/E: 7.88
|Profit Margin (latest qtr) 60.1%
|Debt Ratio: N/A
|One quarter ago
|Two quarters ago
|Dividend Yield: N/A
|Three quarters ago
|Price on 7/25/22
|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)
|Ulta Beauty (ULTA)
Changes Since Last Week’s Update
With the addition of Centrus Energy to the portfolio, and no subtractions or ratings changes this week, we are now up to 18 stocks (of a maximum 20). Given the promising recovery in the market over the last six weeks, that feels like the right number, though all feelings seem tenuous in today’s investing environment. Whether we add to or subtract from our current total a week from now will depend on how earnings and the Fed announcement go this week. Things change quickly on Wall Street these days.
For now, though, there are no changes. Here’s the latest with all our recommendations.
Allbirds (BIRD), originally recommended by Tyler Laundon in Cabot Early Opportunities, makes footwear from sustainable natural materials and is growing at a good pace. Since bottoming at 3.7 in early May, the stock has been in slow-but-steady recovery mode, but has made more meaningful progress in the last two weeks; the stock touched as high as 5.5 last week before pulling back to the low 5s. 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 last month, is a mid-cap ($3.8 billion market cap) manufacturer of vehicle transmissions with about $2.7 billion in revenues. The stock had a good week, jumping from 37 to 39. 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. And, it is a leading producer and innovator in electric axles which all electric trucks will require. Another indicator of its advanced capabilities: Allison was selected to help design the U.S. Army’s next-generation electric-powered vehicle. The company generates considerable free cash flow and has a low-debt balance sheet. Its capable leadership team keeps its shareholders in mind, as the company has reduced its share count by 38% in the past five years.” BUY
Aris Water Solutions (ARIS), originally recommended by Tyler Laundon in Cabot Early Opportunities, and featured here three weeks ago, 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 gotten off to a very good start since we recommended it, up 24%, including a big move Monday morning! Buy now if you haven’t already done so. 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, “The focus of (our) June issue was that technology had been oversold and was likely to recover before the overall market. Since then, tech has been the second-best-performing market sector and AVGO is up around 11%. Inflation and the Fed may be all the rage right now. In six months, it could be a different story. But the fact that we are in a technological revolution that is gaining steam won’t change. Broadcom is also very well positioned to benefit in a fundamental way and should have continued strong earnings.” HOLD
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has had a good bounce this month, but remains deeply oversold. In his update last week, Tom wrote, “This defensive infrastructure partnership took a hit along with everything else in June. But it has been solid in the absence of market panic. BIP should be ideally suited for this market over the rest of the year. Its earnings are highly recession resistant, and Brookfield has inflation adjustments built into its contracts. Earnings are growing at a higher-than-normal clip because of the recent midstream energy acquisition and the stock is a very reliable dividend payer. (This security generates a K-1 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 it had a good week, up from 42 to 44, thus giving it a stay of execution. I’m going to hold on to it for now and see if the rebound can continue (it bottomed at 41 in May and again in early July), and because Bruce still likes it. In his update last week, Bruce wrote, “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 41 or so 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.
“The valuation is attractive at 8.6x EV/EBITDA and 13.0x 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 rose 2% in the past week and have 51% upside to our 66 price target.” HOLD
CVS Health (CVS), originally recommended by Carl Delfeld in Cabot Explorer, remains above its June lows but below its 200-day moving average. The stock didn’t budge this past week. In his update last week, Carl wrote, “The company expects to report its next earnings report on August 3. This is a good value stock for this sort of market because its first-quarter revenue was up nicely and CVS Health’s earnings per share has grown 26% annually, compounded, over the past three years. 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, trading at just over 11 times forward 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 remains wild, which isn’t ideal, but we’re intrigued—the stock had a big shakeout last week after Congress basically rejected any green energy boost, but shares quickly stormed back and are testing resistance in the 220 area. Earnings are due next Tuesday—let’s see if results please the market.” 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 were up a point this week to reach 16. Fanuc is a high-quality stock that should be firm with its strong balance sheet and a huge stockpile of 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
Molson Coors (TAP), originally recommended by Bruce Kaser in the Buy Low Opportunities Portfolio of his Cabot Undervalued Stocks Advisor, was essentially flat in its first week in the Cabot Stock of the Week portfolio. The company is set to report earnings next Tuesday, August 2, so there may not be a ton of movement in the share price until then. In his update last week, Bruce wrote, “Our thesis for this company is straightforward – a reasonably stable company whose shares sell at an overly discounted price. Its revenues are resilient, it produces generous cash flow and is reducing its debt. A new CEO is helping improve its operating efficiency and expand carefully into more growthier products. The company recently reinstated its dividend.
“Constellation Brands, owner of a variety of popular beer and other alcoholic beverage brands, recently reported strong revenues and earnings as both volumes and pricing were surprisingly strong. Unless Constellation is taking share from Molson, Molson is likely to report an encouraging quarter.
“TAP shares … have about 26% 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 9.2x estimated 2022 results, still among the lowest valuations in the consumer staples group and below other brewing companies.” 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, though it did have a bit of a hiccup last week, dipping from 20 to 19. In his update last week, Carl wrote, “Nio reported its second-quarter vehicle deliveries late last week, with quarterly vehicle deliveries up 14% year over year and June deliveries increasing 60%. New Nio models continue to be launched and some offer battery upgrades with ranges of 621 miles on a single charge. There are short sellers out there and the SEC and China are still wrangling about Chinese companies like Nio complying with American financial disclosure requirements. I would have a 20% stop-loss in place for this stock while I monitor the situation.” HOLD
ONEOK, Inc. (OKE), added to the Stock of the Week portfolio two weeks ago and originally recommended by Tom Hutchinson in Cabot Dividend Investor, continued its recent rebound, up two more points this past week. 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, mid-continent, 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. In his update last week, Tom wrote, “The stock was up 65% in 2021 and the growth isn’t as impressive because it never declined much even during the pandemic. But it has stable revenues, a rock-solid dividend and inflation adjustments built into its contracts. OKE should be a good place to be going forward.” BUY
Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Buy Low Opportunities Portfolio, bounced nicely last week after a rough start to the month. OGN’s early-July retreat, at a time when most other stocks were rebounding, prompted me to downgrade the stock from Buy to Hold last week. It’s not out of the woods yet, still well below its moving averages. But Bruce still rates it a Buy in part because, as he noted in his update last week, shares still “have about 45% upside to our 46 price target” and “continue to trade at a remarkably low valuation while offering an attractive 3.5% dividend yield.” HOLD
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, though it has dipped a couple points since topping out at 53 the first week of July. Still, the intermediate-term trend is up, and the 3.1% dividend yield helps. Earnings are due out this Thursday (July 28) so we’ll see how that affects the shares. BUY
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, jumped 12% after the company reported impressive second-quarter earnings last Wednesday. The company beat earnings estimates by 26%, and grew revenues by 42% for its third-best sales quarter to date. In addition to those bright shiny numbers, the company reported progress on its two new factories, with its Berlin facility topping 1,000 cars per week in June and its Austin, Texas approaching the same milestone in the coming months, according to Elon Musk. As a result, the company maintained its soft guidance for 50% average annual growth on vehicle deliveries over the next few years. Investors ate it up, pushing TSLA shares to their highest point since early May. Still trading below its 200-day moving average, we’ll keep the stock at hold for now, and see if it can add to last week’s big move. HOLD
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had another solid week, reaching as high as 411 before pulling back. It’s still well below its June and April highs, but the recent bounce is encouraging. We’ll keep at hold to see if the rally can last more than just a couple weeks. HOLD
Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, broke out to new multi-month highs above 215 before pulling back slightly. The stock is now up 13% since mid-June, with fiscal third-quarter earnings looming this tomorrow (Tuesday, July 26) after the market close. In his update last week, Tom wrote, “The recent market upside is being kind to Visa. 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. … This stock will be one of the first in line to move higher as the market recovers.” HOLD
The next Cabot Stock of the Week issue will be published on August 1, 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.