Cabot Stock of the Week Issue: November 14, 2022

Amazing what a slightly better-than-expected inflation rate can do for stocks.

After months of coming in a bit higher than economists’ expectations, the October inflation rate bucked the trend, dipping to 7.7%, lower than the projected 7.9% rate. The result? Stocks had their best day since April 2020.

The second the new data came out Thursday morning, stocks reversed course from the week of losses caused by, first, more hawkish comments from the Fed and then, on Wednesday, uncertainty in the wake of the midterm elections, many of which were too close to call. Well, now we know that the Democrats will retain control of the Senate and the House is likely, though not certainly, to come under Republican rule, resulting in the split Congress – and, thus, constant gridlock – that Wall Street loves. Combine it with an inflation rate that’s finally dropping faster than the experts thought, and this has all the makings of a classic post-midterms rally.

Or it could be yet another bear market rally.

I choose to believe the former, at least in the intermediate to long term. It’s entirely possible another dip is coming, maybe even this week. But since World War II, stocks have never been lower 12 months after a midterm election, and the third year of a new president’s term boasts an average gain of 20.1%, according to Ryan Detrick of Carson Group. So, it’s a good time to buy, even if there is more turbulence ahead.

Today, however, we are adding a stock that should perform well in almost any market climate. That’s because it’s a company that helps bring people around the world one thing everyone needs: food. It’s a recent discovery from Cabot Explorer Chief Analyst Carl Delfeld. Here are Carl’s latest thoughts.

Corteva (CTVA)

The agribusiness sector is pretty failsafe, no matter the economic or political climate. And today, I have a company that should grow no matter what the politicians do since we all must eat, though about 800 million still live in extreme poverty according to the World Bank.

The Global Food Security Index, developed by Economist Impact, measures the state of food security across 113 countries through 68 indicators and four key categories: affordability, availability, quality and safety. During the last few years, the food security index was down, and this trend continues in 2022 as food prices increase and economic growth slows.

According to the World Bank’s projections, the global middle class will rise from 400 million in 2000 to 1.2 billion by 2030, controlling over $6 trillion in spending power. Studies show that as incomes rise in emerging markets, diets change rapidly with less rice and vegetables and more meat and dairy. Agribusiness is a growth sweet spot at the bullseye of supply and demand for food.

That brings me to Corteva (CTVA).

Based in Indianapolis, Corteva uses emerging technology to help farmers improve crop yields, boost output and increase the consistency of production from year to year, no matter the weather. A spinoff from DowDuPont three years ago, the firm builds on DuPont’s Pioneer seed business and Dow’s crop chemical business. Many of Corteva’s products are based on entirely natural processes, but its seed business sells both conventional and genetically modified seeds that produce maximum agricultural output per acre.

Genetically modified seeds also offer better resistance to disease, drought, extreme heat and cold, insects and herbicides – and can be used to improve nutritional characteristics as well. Products such as herbicides, insecticides and nitrogen stabilizers also protect against weeds, pests and diseases.

You should be aware that modified seeds are controversial in some quarters and some grocery chains label food products that contain genetically modified organisms (GMOs). Still, nearly 80% of processed foods on U.S. grocery shelves – breakfast cereals, snack foods, soft drinks – contain genetically modified ingredients. According to the Environmental Working Group, the nation’s leading environmental health research group, the average American consumes 193 pounds of genetically engineered food each year. Yet, most Americans polled believed they had never eaten genetically modified foods.

Genetically modified seeds are necessary to feed the world as they allow farmers to produce better-quality crops while using fewer pesticides, herbicides and fertilizers. Therefore, on 20% less land, America now grows five times as much corn as it did in the 1930s. The yield per acre has grown more than six times in the past 75 years. So, when 8 billion people wake up every single day – they will hopefully have food to eat.

While the market is down sharply over the past year, Corteva is up more than 40%. Although the down market does lead to quality companies growing top-line revenue and net profits trading at bargain prices, a strong case can be made for stocks like Corteva that are recession-resistant and outperforming the market on a relative basis. Recently, Corteva reported a 12% increase in net sales and beat earnings expectations by about 50%. Earnings per share are projected to grow from $2.50 this year to perhaps $3.25 in 2023. Meanwhile, revenues are growing steadily and should continue to do so: Analysts expect 11.2% sales growth this year and another 5.7% growth in 2023.

Trading at 22 times forward earnings, the stock isn’t overly expensive given that it just hit new all-time highs this month (the stock came public in May 2019). There’s still plenty of room for growth here, and demand for food isn’t slowing down anytime soon, especially as the global middle class expands.

Current Recommendations

Changes Since Last Week’s Update

Enphase Energy (ENPH) Moves from Hold to Buy
Montauk Renewables (MNTK) was Sold

Despite the very good week for stocks, two of our recommendations were victimized by a combination of underwhelming earnings and textbook Wall Street overreaction. Both of them were renewable energy names: Montauk Renewables (MNTK) and Centrus Energy (LEU), both of which tumbled double digits after falling short of Q3 estimates last week. That prompted a rare Alert from us last Thursday, where I advised that you Sell MNTK but hang on to LEU. My reasoning? MNTK had been back-sliding for weeks with no support in sight; LEU, however, had been our single best-performing stock this year and remains one of them in spite of a 31% (!) nosedive last Wednesday.

The rest of our stocks are acting quite well – including another renewable energy name, Enphase Energy (ENPH), which gets bumped back to Buy this week. Most have cleared their earnings hurdle, the vast majority of them with flying colors. Green Thumb Industries (GTBIF, +19%) and Kinross Gold (KGC, +9%) were among the other big earnings winners, though none of them topped our newest addition, Wingstop (WING), which added 100 points in its first week in the portfolio!

Here’s what’s happening with our stocks.

Updates

Arcos Dorados (ARCO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, was down about 6.5% in the past week, ahead of earnings this Wednesday, November 16. There was no apparent reason for the drop-off, though McDonald’s (MCD) dipped after reporting earnings last week, so ARCO’s decline was likely in sympathy with MCD’s fall (Arcos is the world’s largest independent McDonald’s franchisee). We’ll see how Arcos’ own earnings report impacts the share price, which currently has about 17% upside to Bruce’s 8.50 price target. BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, was up about 5% in the last week on the heels of a strong earnings report. Tom provided some details on those earnings in his latest update: “The infrastructure partnership reported terrific earnings last week. It soundly beat expectations with funds from operations (FFOs) growth of 24% for the quarter. That’s impressive considering BIP has fallen more than 20% from the high over the past couple of months. Rising interest rates soured investors as fixed-rate alternatives became more attractive. But the selling is likely overdone because its crucial assets will continue to deliver steady earnings through a recession, it has inflation adjustments built into its contracts, the dividend is solid, and the stock is cheap now.” HOLD

Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, has been on quite the rollercoaster ride this past week. On Wednesday, the nuclear energy company reported earnings that missed expectations by a wide margin, and the stock completely cratered, plummeting 31%(!) to fall all the way to 30. Then, on Thursday, likely aided by the big post-inflation-report run-up in stocks, LEU recovered about half its losses and has kept rising since. All told, the stock was down about 14% in the last week – bad, but not catastrophic considering how much it had advanced the previous few months.

In his latest update, Carl wrote, “Centrus Energy (LEU) surprised investors as it came out with a quarterly loss of $0.42 per share versus the Zacks consensus estimate of $0.78. This compares to earnings of $2.95 per share a year ago. The huge earnings miss led to a sharp correction to the stock yesterday because expectations were high since a quarter ago Centrus delivered a positive surprise of 214%. Making matters worse, Centrus posted a net loss of $6.1 million on revenue of $33.2 million in Q3 2022, compared to net income of $42.1 million on $91.3 million in revenue in Q3 2021. Centrus’ CEO commented that ‘our third-quarter results reflected the typical lumpiness attributable to the timing of customer deliveries.’ It sure seems as though the market overreacted to a bad quarter. Centrus has cash of $115 MM and debt of $150 MM and the stock remains a buy at this point for aggressive investors.”

For us, it was a Hold even prior to last week, and we’ll keep it that way for now until the stock settles into a more predictable pattern. HOLD

Comcast Corporation (CMCSA), originally recommended by Bruce Kaser in the Growth & Income Portfolio of his Cabot Undervalued Stocks Advisor, had a very good week, up roughly 9%. Stellar Q3 earnings continue to be the apparent catalyst. In his latest update, Bruce wrote, “On October 27, Comcast reported a decent third quarter that was consistent with our thesis. Excluding the one-time boost from the year-ago Tokyo Olympics, revenues would have grown by 5%. Even with the one-time boost a year ago, third-quarter profits rose by 6%. Small losses in the number of cable subscribers were nearly offset by an increase in wireless subscribers. Comcast repurchased $3.5 billion of shares in the quarter. Overall, the company is making incremental progress with its incremental initiatives to defend its franchises and is returning sizeable amounts of cash to shareholders. Comcast’s revenues were in-line with estimates while adjusted earnings and adjusted EBITDA were above estimates.

“There was no significant company-specific news in the past week.

“Comcast shares … have about 23% upside to our 42 price target. The shares offer an attractive 3.2% dividend yield.” BUY

Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had a very good week, recovering almost all its losses from the previous week, and is again hovering around 300 a share. In his latest update, Mike wrote, “Enphase Energy (ENPH) still looks like a potential leader to us—granted, we were kicked out of it a few weeks ago during a sharp (28% from high to low) correction, and if the Q3 report wasn’t pleasing, a further decline would have been in the cards. But it turns out business is actually still accelerating: Sales rose 81% and earnings were up 108% in the quarter, and analysts hiked estimates for next year (earnings up 24%, likely conservative) as demand for its microinverters (as well as batteries and EV chargers) is surging. Like most names, ENPH is still battling with resistance, but we’re going to start a half position here with a stop in the 260 area, with the idea of averaging up if things get going.” Let’s bump ENPH back up to Buy as well, after having it at Hold in recent weeks. MOVE FROM HOLD TO BUY

Green Thumb Industries (GTBIF), originally recommended by Tim Lutts and then Michael Brush in the Sector Xpress Cannabis Advisor, was up 19% in the past week to reach new six-month highs above 14. The stock continues to gain steam on the heels of a strong earnings report earlier this month. In his latest update, Michael wrote, “Green Thumb reported 3% sequential sales growth and 12% year-over-year growth to $261 million, on November 2. Year-to-date revenue increased 17% to $758 million compared to the first nine months of 2021. Revenue growth was primarily driven by increased retail sales in New Jersey and Illinois, the addition of 12 retail locations, and increased traffic in the company’s 77 retail stores. Same-store sales (at stores open at least 12 months) declined 1.6% as price compression offset continued traffic and volume growth. Gross margins slipped to 50.2% from 55.4% in the comparable period last year.

“Green Thumb posted its ninth consecutive quarter of positive net income, delivering $10 million, or four cents a share in profits. The company posted $48 million in cash flow, and cash of $147.3 million against $255.5 million in debt.

“A key development was the announcement of an agreement to put its RISE Express medical dispensaries at Circle K convenience stores and gas stations in Florida. Green Thumb is starting small, but the Circle K chain has 600 locations in Florida.

“Cantor Fitzgerald’s Zuanic upped his 12-month price target to 36 from 32.” BUY

Kinross Gold (KGC), originally recommended by Clif Droke in his Sector Xpress Gold & Metals Advisor, advanced more than 9% after reporting earnings last Wednesday. Actually, the stock was initially down following the Q3 report, as the company missed top-line estimates by 14% and bottom-line estimates by 2.5%. While revenue was flat year over year, EPS improved 41% from the same quarter a year ago, while profit margins came in at 7.7%, up from a loss in Q3 2021. That, plus the ongoing $300 million share repurchase program, was enough for the stock to bounce back after a brief dip. KGC shares are now up 37% since the beginning of September. BUY

Montauk Renewables (MNTK), originally recommended by Brendan Coffey in his Sector Xpress Greentech Advisor, was sold in a special alert last Thursday after imploding on earnings. The renewable energy company’s story and prospects for future growth are promising, but the stock simply wasn’t performing. SOLD

Ormat Technologies Inc. (ORA), originally recommended by Brendan Coffey in his Sector Xpress Greentech Advisor, was flat last week after a huge post-earnings run-up the previous week. Q3 results beat both revenue and earnings estimates. While EPS was up just a penny (to 33 cents from 32 cents) from the same quarter a year ago, it blew past the 25 cents per share analysts were anticipating. Meanwhile, revenues ($175.9 million) narrowly topped estimates but were up 10.7% from the same quarter a year ago. Furthermore, the geothermal energy company’s CEO said Ormat is “on track with the commercial operation of most of our geothermal projects” and that the company “continues to see strong global tailwinds for renewables.” Investors promptly pushed shares up to 52-week highs above 99, where it has since remained. For the year, ORA shares are now up more than 25%. BUY

Rivian (RIVN), originally recommended by Tyler Laundon in Cabot Early Opportunities, was up from 31 to 33 in the past week, aided somewhat by a rather mixed earnings report last Wednesday. The electric SUV maker reported a third-quarter loss of $1.7 billion – less than analysts expected. Sales were slightly below estimates. The company said it has 114,000 preorders of its vehicles in the U.S. and Canada and maintained production guidance of 25,000 vehicles this year. All told, the earnings report wasn’t overly impressive but was enough for RIVN to rally in a very good week for the market. We’ll see how it behaves this week, especially if the market pulls back a bit. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down another 3.5% in the last week. The stock’s recent weakness initially started following a fairly underwhelming earnings report, but it’s become more about outside factors of late – namely, CEO Elon Musk’s strange behavior and divided attention (he literally just said, “I have too much work on my plate”) since taking over his new toy, Twitter, but recent blow-ups among some of Tesla’s mega-cap tech brethren (AMZN, AAPL, MSFT) may have also contributed to the fall. Regardless, the problems with TSLA stock of late have had little to do with Tesla the company, which is still growing like crazy (41.6% revenue growth, profits more than doubled in Q3). So, I see TSLA’s recent cratering as a buying opportunity. You might not get many more chances to buy TSLA below 200 a share. BUY

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continued to rise, tacking on another 2.5%. Despite a dizzying number of ups and downs, the overall trajectory looks good, with shares of this beauty retailer up more than 25% since May and 12% since it was added to the Stock of the Week portfolio. HOLD

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Growth Investor, was up exactly 100 points in its first week in the Stock of the Week portfolio! There was no obvious catalyst for the huge upmove, which came on pretty light volume. But this kind of run-up lends even more validity to Mike’s theory that WING will be among the new growth leaders of the next bull market. Wingstop is a chicken wing restaurant chain that expects to grow its store base by about 10% a year (the company ended Q3 with 1,898 restaurants—1,631 in the U.S., nearly all franchised, and 225 overseas). Furthermore, Wingstop’s average location brings in about $1.6 million, but it only costs about $415,000 to open a restaurant, which leads to a 70% payback of the initial investment in the first year! There’s a lot to like here, but the stock topped out at 183 in September 2021 before falling on hard times the first half of this year. It’s now back up to 166 and has been stair-stepping higher since late May. BUY

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, had another good week, jumping from 33 to 35. According to Carl, “WisdomTree Emerging Markets High Dividend Fund offers both a high dividend yield and some of the highest quality emerging market stocks in the world with an average price-to-earnings ratio of around 5. This ETF gives broad exposure to large caps, mid-caps and small caps in these countries with an emphasis on income and value. The stocks in its basket tend to be conservative, defensive companies with low valuations and high dividends.” BUY

Xponential Fitness (XPOF), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, got a major boost from earnings last Wednesday. Revenues ($63.8 million) topped estimates by 16% and increased 56% over the third quarter a year ago. Profits remain elusive (-$0.27 EPS) and were worse than expected – but were still narrower than the 59-cents-per-share loss in Q3 a year ago. Meanwhile, the company raised 2022 revenue guidance to $235 million - $240 million, up from the previous range of $211 million - $221 million. There was a lot to like, even with the EPS miss, and shares are now trading at their highest level (21) since May – a week after breaking below months-long support around 17.8. That’s a lot of volatility for this franchisor of boutique fitness brands, but considering the stock has nearly doubled since late June, we’ll keep it at Buy. BUY

The next Cabot Stock of the Week issue will be published on November 21, 2022.