Cabot Stock of the Week Issue: October 10, 2022

Stocks were down again since we last wrote. Nothing new there, at least not in 2022. What made this week perhaps more painful than some of the preceding weekly declines, however, was the way it started: Last Monday and Tuesday were two of the best days of the year, with the S&P 500 adding 5.7%. It seemed, after nine months of relentless selling, the market might finally have been getting its act together.

Then Friday happened. Fueled by a better-than-expected jobs report (remember: good news about the U.S. economy is actually bad news in this twisted year, since it likely means more interest rate hikes), the S&P was down nearly 3%, the Nasdaq nearly 4%, and all three major indexes have continued to sell off today. So, we’re right back near those September lows – actually the Nasdaq appears on track to hit new lows – making this yet another in a long line of bear market rallies that amount to little more than teases and false starts.

Another big data point comes out this week, as we’ll get the latest Consumer Price Index (i.e., the inflation rate) number on Thursday morning. If inflation remains north of 8%, it could mean more pain for investors in the days and weeks ahead. But it might not be bad for gold prices, which is why this week I am adding a gold mining company recommended by Sector Xpress Gold & Metals Advisor chief analyst Clif Droke. In fact, it’s the only stock Clif is currently recommending. Here it is, with Clif’s latest thoughts on it.

Kinross Gold Corp. (KGC)

There’s no disputing that gold has disappointed investors’ expectations so far in 2022. What started as a promising year—with investors almost unanimously expecting inflation to skyrocket (thereby boosting gold’s appeal)—has mostly seen rising interest rates and a strengthening dollar consistently undermine interest in the yellow metal.

But as the dollar’s fortunes keep expanding at the expense of foreign currencies, several global players are growing weary of the greenback’s dominance, with a growing number of countries devising plans to counter it. Should these “de-dollarization” plans succeed, gold should come into its own in the coming months. And that in turn will benefit the companies that mine and explore for gold, including top producer

Dollar strength is in fact the biggest contributor to gold’s weakness this past year, as the U.S. dollar index has embarked on its best showing in over 20 years. But the dollar’s strength has come at the expense of other nations’ currencies, in turn drastically increasing inflation rates abroad while mitigating the impact of higher consumer prices here at home.

However, signs have lately emerged that nations are taking steps to reverse what many see as America “exporting” its inflation problem for others to contend with. Russia is one such country taking steps to reduce its reliance on the greenback, as Kremlin authorities recently initiated a policy of banning the use of dollars as collateral for transactions with Russia’s largest financial services marketplace. Financial commentators see the move as being a significant move in a growing global trend toward “de-dollarization.”

Elsewhere in the world, China has drastically reduced its holdings of U.S. Treasury debt (which recently fell under $1 trillion for the first time since 2010), while also embarking on an effort to unload dollars in order to stabilize its own currency. Even Egypt’s government has been issuing debt denominated in China’s currency as an alternative to the higher borrowing costs associated with the U.S. dollar.

Meanwhile, as the dollar reserves of many countries are shrinking, gold reserves are increasing as a nascent shift seems to be underway from using the dollar as a preferred safe haven to that of gold.

To that end, a World Gold Council (WGC) report found that 80% of the 57 central banks it surveyed plan to increase their holdings of the metal in the coming year. Moreover, some 42% of those surveyed anticipate the greenback will diminish as a portion of total reserves in the next five years due to loss of confidence in the dollar as a reserve currency.

Put another way, as the global de-dollarization trend accelerates, gold should begin to come into its own. This is where Kinross comes into play.

Kinross is a senior mining firm that acquires, explores and develops gold properties in the U.S., Canada, Brazil, Chile, and Mauritania. Producers like Kinross provide investors with excellent leverage in a bullish gold environment, and KGC has historically outperformed physical gold prices in bull markets. (In gold’s last major bull run, for instance, the gold price rose 70% between 2018 and 2020, while KGC gained an astounding 300%!)

From a financial perspective, Kinross was one of the few major gold miners that posted higher revenue in Q2, with total sales of $822 million increasing 16% a year ago. The company also reported cash and equivalents of $719 million, and total liquidity of approximately $2 billion as of the quarter’s end, providing plenty of capital to take on new projects and fund existing operations.

Management also recently provided upbeat guidance, with plans to “significantly” increase production in the second half of the year, primarily driven by stronger production at its Paracatu, Tasiast and La Coipa gold projects. Kinross further expects all-in sustaining costs per gold equivalent ounce sold (a key metric) to be approximately $1,240—about $430 per ounce below the current gold price.

On the development front, the company is proceeding with development of its 70%-owned Manh Choh project in Alaska, which is expected to increase the firm’s production profile by approximately 640,000 attributable ounces over the life of mine at lower costs. Kinross’ world-class Great Bear project in Ontario, meanwhile, continues to make excellent progress, with drilling results from the first half of the year continuing to confirm Kinross’ vision of developing a large, long-life mining complex.

Technically speaking, the stock is showing observable relative strength versus most actively traded gold shares, suggesting accumulation by informed interests is taking place. For all the above-mentioned reasons, I view Kinross as worthy of consideration for conservative, long-term-oriented investors.

CURRENT RECOMMENDATIONS

Changes Since Last Week’s Update
Broadcom (AVGO) Moves from Hold to Sell
Celsius (CELH) Moves from Buy to Hold
Enphase Energy (ENPH) Moves from Buy to Hold
Montauk Renewables (MNTK) Moves from Buy to Hold

We have just one sell this week, as Broadcom (AVGO) is the latest to get the chop after months of weakness. With the addition of Kinross Gold (KGC), that means we’re holding firm at 12 stocks. However, we’re downgrading three other stocks from Buy to Hold after they too got caught up in the latest round of selling; Greentech stocks, a rare bright spot in recent weeks and several of which we’ve added to the portfolio, had a particularly rough week.

Still, there were a couple bright spots, namely Xponential Fitness (XPOF), which is up about 10% in the two weeks since we added it. Here’s the latest with all our stocks.

Updates

Arcos Dorados (ARCO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, was essentially flat this past week, rising and falling along with the market. In his latest update, Bruce wrote, “Macro issues have a sizeable impact on the shares’ trading, including local inflation and the Brazilian currency. Since early 2020, the currency has generally stabilized in the 1.00 real = $0.20 range. As the company reports in U.S. dollars, any strength in the local currency would help ARCO shares. Favorably, Latin American currencies have generally held value against the dollar even as the dollar has surged against developed nation currencies.

“A near-term driver is the October presidential election. This past week, challenger and former president Luiz Inácio Lula de Silva received 48% of the vote, with incumbent Bolsonaro receiving 43%. As no candidate received a majority, the second round will take place on October 30. The initial round was in some ways an ideal outcome for Arco, as Lula received more votes but not a majority, which will likely moderate his left-leaning approach assuming he wins in the run-off. A win by Bolsonaro may similarly moderate his far-right tendencies. One risk if Bolsonaro loses by a close margin in the run-off is that he might launch a ‘vote steal’ campaign, which could create political chaos and possible violent protests, neither of which would be favorable for Arcos.

“ARCO shares … have 14% upside to our 8.50 price target.” BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, fell to new 2022 lows as of this morning, though it’s not a new closing low yet. Not a great sign, and the stock is down 22% in the last two months, putting us at a small loss. With the 50- and 200-day moving averages well in the rear-view mirror at this point, let’s go ahead and step aside from AVGO before our losses become anything significant. MOVE FROM HOLD TO SELL

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has a similar chart to Broadcom’s, hitting new 2022 lows as of this morning after falling for a solid month. The difference is we don’t have a loss on BIP, so we’ll keep it at hold for now to see if things can turn around. In his latest update, Tom wrote, “This reliable revenue generator really took it on the chin over the last month, falling 15% to a new 52-week low. That’s surprising because its crucial infrastructure assets are virtually recession-proof and inflation adjustments are built into the contracts.

“The problem is interest rates. BIP is classified as a utility, and that sector, along with REITs, have been the worst-performing sectors over the past three- and one-month periods. Competing fixed income investments become more competitive with higher rates. But all those other great attributes still apply. And a recession should bring interest rates back down.” HOLD

Celsius (CELH), originally recommended by Mike Cintolo in Cabot Growth Investor, dipped about 5% in the last week, though it was one of the few growth stocks up in early trading today. Having fallen below two-month support around 88, let’s downgrade the stock from Buy to Hold. Mike actually sold out of CELH recently, though he has decided to keep it on his watch list, writing, “We’re simply keeping an eye on it with the thought that the recent weakness—which was severe, pulling the stock in 28%—could end up being part of a normal base-building effort that could eventually resolve itself to the upside. It needs work for sure, but we’re keeping an eye on it for now.” Because we didn’t recommend shares of this energy drink upstart until three weeks ago, our losses are much smaller, so we can afford to hang on to it. But a downgrade to Hold feels appropriate given the recent weakness. MOVE FROM BUY TO HOLD

Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, came crashing back to earth after a good week the prior week. Still, the stock remains above its September lows (36), and it remains one of our best performers, up nearly 30% since we added it to the portfolio in late July. In his latest update, Carl wrote, “This nuclear fuel supplier’s deployment-ready centrifuge enriches uranium for utilities in U.S. and abroad. No other commodity features the incredible energy density of nuclear fuel. One uranium fuel pellet has the energy potential equivalent of 149 gallons of crude oil.

“Centrus’ net income margins are above 50% for the year, and the company recently announced that it has secured new nuclear fuel sales contracts and commitments worth an estimated value of $270 million so far this year. Nuclear power provides 20% of the power for our electricity grid and more than 50% of U.S. emission-free energy, according to the Department of Energy. Centrus stock is still trading way off its 52-week high and at less than four times earnings.” HOLD

Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had a rough week, falling more than 11% and dipping to its lowest point since July. It was enough to convince Mike to sell. But we’ll hang on to ENPH, in part because we’re still sitting on a nice return since Tim recommended it in late June. Mike’s parting words for ENPH were the following: “The biggest character trait of the market all year—and even during this week’s rally—is that basically every strong area has eventually been taken out and shot sooner or later. And this week, it’s looking like solar’s time to come under the knife; some secondary names got hit hard during the market’s September decline, and this week, Enphase (possibly the best-looking growth stock in the entire market) cracked, easily slicing through support on monstrous volume on no news, causing us to sell our position. Similar to Celsius, we can’t conclude ENPH is about to disintegrate—it’s possible this crack leads to an intermediate-term launching pad that eventually kicks the stock higher, so it’s worth keeping an eye on to see if it can stabilize.” We’ll hang on to it, but as with Celsius, a downgrade to Hold on the heels of a really rough week seems warranted. MOVE FROM BUY TO HOLD

Montauk Renewables (MNTK), originally recommended by Brendan Coffey in his Sector Xpress Greentech Advisor, had the worst week of any stock in the portfolio, plummeting more than 19% since we last wrote. Like Mike said about Enphase above, renewable energy stocks – one of the market’s few bright spots in recent weeks – finally drew the ire of the sellers last week, and MNTK was certainly no exception. Its fall, from 18 to 14, was enough to prompt Brendan to sell it, as it tripped his sell-stop of 16.50. But as Brendan admitted in selling it, “There’s no clear reason for MNTK’s drop.” So, we’ll hang on for now, but as with too many other stocks this week (seemingly every week of late), we’ll downgrade to Hold. MOVE FROM BUY TO HOLD

Ormat Technologies Inc. (ORA), originally recommended by Brendan Coffey in his Sector Xpress Greentech Advisor, was down, but not as sharply as most other renewable energy stocks, dipping merely from 88 to 84, still firmly above its 200-day moving average (80). So, we’ll keep ORA – the only publicly traded U.S. geothermal company – at Buy. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down about 7% after the company missed expectations on third-quarter deliveries. The company delivered 343,000 cars in Q3, well shy of the 364,660 that were expected. While production was up from the previous quarter, issues at its new factories in Germany (where a fire recently broke out) and Texas weighed on overall production. Still, despite missing estimates, Q3 deliveries marked a new quarterly record and were 42% higher than the same quarter a year ago and much higher than the previous record of 310,000 deliveries, set in the first quarter of this year. As for TSLA stock, it’s holding right around three-month support in the 225 range and is still up from its May lows. Earnings are due out next week (October 19), which could trigger a bounce-back; at the least, I think any bad news related to deliveries in that report is already baked into the stock price. So, I actually think this looks like a great potential entry point if you don’t already own the stock. BUY

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down this past week, though it held firm at recent support around 385. The trajectory since May lows remains up despite some wild swings. I still like the looks of this retailer as we near holiday shopping season. BUY

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, was flat in its first week in the Stock of the Week portfolio. In his update last week, Carl wrote, “WisdomTree Emerging Markets High Dividend ETF covers 17 different emerging markets and gives broad exposure to large caps, midcaps and small caps in these countries. Emerging markets make up about 80% of the countries in the world representing 77% of the world’s landmass and 85% of its population. These countries now represent roughly 60% of total global GDP while just two decades ago they accounted for only 23%.

“This ETF has a clear income and value strategy. The stocks in its basket tend to be conservative, defensive companies with low valuations and high dividends.

“And WisdomTree makes adjustments to the portfolio every year to make sure the companies in the ETF basket are in the top 35% of emerging market companies by dividend yield. Furthermore, this ETF holds some of the cheapest quality stocks in the world with an average price-to-earnings ratio of 5.5 (vs. 12 for the MSCI Emerging Markets Index and about 20 for the S&P 500).” BUY

Xponential Fitness (XPOF), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, was up for a second straight week since being added to the portfolio, which basically makes it worthy of knighthood. The company is the largest franchisor of boutique fitness brands in the U.S. with roughly 2,000 studios across 48 states. It also has over 175 studios open in 11 foreign markets and even has studios on cruise ships crossing the world’s oceans. As people return to gyms in the post-Covid era, Xponential Fitness saw revenues improve 66% in the second quarter, is on track for 42% revenue growth in 2022, and expects to turn profitable in the coming quarter. Meanwhile, the stock is trading smack in the middle of its recent 17.8-to-21 range. BUY

The next Cabot Stock of the Week issue will be published on October 24, 2022.