Cabot Stock of the Week Issue: October 17, 2022

The bear market is alive and well, but there were some positive signs this week. For starters, the major indexes are actually up slightly since we last wrote, which is a welcome departure from almost every other week since about mid-August. Perhaps more encouraging was how stocks responded to another disappointing CPI report: the September inflation rate dipped only to 8.2% (from 8.3% in August), higher than the 8.1% economists had projected; a similar “miss” last month sent markets into a three-week downward spiral. On Thursday, when the report came out, all three indexes were up at least 2%. Granted, they gave back those gains and then some on Friday, but they’ve risen even higher today. That kind of back-and-forth can give you whiplash if you get too caught up in the day-to-day gyrations, but in the aggregate, stocks are up about 2.5% to 3% in October. If recent form holds, they could be right back to flat for the month tomorrow; but even a flat October would be a win considering how bad the nine months prior have been.

With not much net movement from the markets this past week, we mercifully have no changes to the portfolio for the first time in a while. And we have an exciting addition, which marks the Stock of the Week debut of Michael Brush, our new Sector Xpress Cannabis Advisor chief. Michael is a contrarian, and he thinks marijuana stocks – perhaps the single most beaten-down subsector over the past 18-20 months – are ripe for the picking right now. I agree!

So today, since we haven’t had any cannabis exposure in quite some time, I am adding one of the more promising-looking plays on a cannabis sector rebound in the SX Cannabis Advisor portfolio. Here are Michael’s latest thoughts on it.

Green Thumb Industries (GTBIF)

One of the largest cannabis companies in the U.S., Chicago-based Green Thumb (GTBIF) has 77 retail outlets in 15 markets, and 17 manufacturing facilities. It has been the most profitable multistate company among the large operators. Green Thumb has posted profits over the past eight quarters, a sign of good management.

Second-quarter revenues advanced 15% from the previous year to $154 million and 5% sequentially, but that was largely from store openings. Same-store sales (at locations open for 12 months or more) were down 1.5%, but up 10% sequentially. The company posted earnings of 10 cents per share.

Revenue growth was driven mainly by increased retail sales in New Jersey as the legal market opened up, and increased retail sales in Illinois. Green Thumb has opened 19 new locations since last year, and it has seen increased traffic in most of its stores. The company has posted $40 million in operating cash flow so far this year.

Green Thumb manufactures and distributes a portfolio of branded medicinal and recreational cannabis products including &Shine, Beboe, Dogwalkers, Doctor Solomon’s, Good Green, incredibles and RYTHM. The company operates a national retail cannabis store called RISE.

Ongoing market developments in Illinois and New Jersey could be strong catalysts for Green Thumb Industries, says Stifel’s Andrew Carter, who has a buy rating on the stock. Illinois will increase its store footprint by more than 2.5 times. Considerable upside exists in New Jersey as product offerings expand in the second half of this year.

Like most cannabis names, Green Thumb looks cheap because the sector has been beaten down so much. The New Cannabis Ventures Global Cannabis Stock Index is down over 70% in the trailing 12 months. Green Thumb trades at a price-to-sales ratio of 2.44, which seems low given its 15% year-over-year sales growth.

As with all cannabis names, Green Thumb’s shares will be driven by developments on the political front in areas like decriminalization, especially at the federal level, and progress on bills that clear the way for cannabis companies to have greater access to banks and bigger stock exchanges. A bill to watch because it would do this is called the Secure and Fair Enforcement Act, known as the SAFE Banking Act.

These bills don’t necessarily have to pass to create big moves in cannabis names. Headline news on progress will spark buying interest, as we saw in early October when President Biden asked federal agencies to speed up review of cannabis decriminalization. Many politicians still oppose decriminalization; however, polls show voters favor it, which puts pressure on opponents to go along.

The bottom line: It makes sense for investors in general to have at least some cannabis exposure as a play on the inevitable pop once politicians show signs of legislative progress. Those efforts are not over yet. This will happen sooner or later. The only question is timing.

Big picture, Green Thumb should benefit from favorable long-term trends in the sector. Cowen cannabis analyst Vivien Azer expects U.S. cannabis sales to grow at a 12% compound annual growth rate to hit $45.6 billion in 2027. Her projection assumes no federal legalization. “We continue to remain constructive on the U.S. cannabis industry,” says Azer.

One positive to keep in mind here is that Green Thumb is founder-run. Founder Ben Kovler is chairman and CEO. Research shows that founder-run companies often outperform. Kovler has a 26% stake in the business and holds nearly 59% of voting power.

Risks include cannabis oversupply, which is putting downward pressure on prices, though this could also help Green Thumb since lower prices attract more price-sensitive consumers to the legal market. Other risks include competition from illicit market operators who have big cost advantages since they are not taxed, a lack of progress on decriminalization and banking reform, and state issuance of an excessive amount of operating licenses. Still, the positives far outweigh the potential negatives.

Current Recommendations

Changes Since Last Week’s Update
None

As I mentioned at the top, there are no changes to the Stock of the Week portfolio this week. Wahoo!!! Is it a sign of more peaceful – perhaps even bullish – times to come after 9-10 months of pure rancor, 11 months if you’re a growth investor? Maybe. But I’m not going to read too much into one week of calm. What I am going to do is hang on to all 12 of our previously existing positions, several of which were up double digits in the past week, and none of which suffered any more than minimal losses.

Here is what’s happening with all our stocks.

Updates

Arcos Dorados (ARCO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, was essentially flat again this week and has scarcely budged since we added it to the portfolio six weeks ago – during which the S&P has tumbled nearly 8%. That kind of stability is why we recommended shares of this overseas fast-food giant. Here are Bruce’s latest thoughts on it: “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 – a remarkably favorable trait given the sharp declines in other currencies around the world. As the company reports in U.S. dollars, any strength in the local currency would help ARCO shares.

“The results of the upcoming October 30 presidential election run-off will likely drive the broad Brazilian stock market and thus Arco’s shares.

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

“ARCO shares … have 16% upside to our 8.50 price target.” BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, was flat this week despite some ups and downs. In his latest update, Tom wrote, “This reliable revenue generator really took it on the chin over the last month, falling more than 20% 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, has been the worst-performing sector over the past month. 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. (This security generates a K-1 form at tax time).” HOLD

Celsius (CELH), originally recommended by Mike Cintolo in Cabot Growth Investor, was down slightly this past week, rescued by a very good morning today (up around 5%). Last week, we downgraded the stock to Hold on weakness and will keep it right there. Mike’s doing the same, as he wrote in his latest update: “CELH continues to correct, but we’re still keeping an eye on it as (a) the pullback certainly isn’t abnormal given the summer run to new highs, and (b) we doubt anything has changed with the underlying story.” HOLD

Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, bounced back nicely this past week, recovering some of its losses from the previous week. The stock appears to have found pretty clear support around 36; it’s now up to 39, giving us a very nice gain. In his latest update, Carl wrote, “There was no negative news for this nuclear fuel supplier’s deployment-ready centrifuge that enriches uranium for utilities in the U.S. and abroad. No other commodity matches the incredible energy density of nuclear fuel. Just one uranium fuel pellet has the energy potential equivalent of 149 gallons of crude oil.

“Centrus’ net income margins are above 50% so far this year, and the company recently announced that it has secured new nuclear fuel sales contracts and commitments worth an estimated value of $270 million this 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 so this stock remains an excellent value and a buy.”

We actually downgraded LEU to Hold a few weeks back, but if you haven’t yet bought it, I’m not opposed to a bit of nibbling now that the stock is back above its 200-day moving average. HOLD

Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continued its recent fall, though the losses were more limited this week. But with earnings due out next week, plus the fact that we’re still sitting on a 23% return in less than four months, I’m keeping it at Hold. HOLD

Kinross Gold (KGC), originally recommended by Clif Droke in his Sector Xpress Gold & Metals Advisor, was down about 6% in its first week in the portfolio. But the stock was up this morning, and Clif likes its long-term prospects, as he wrote in his latest update: “Kinross Gold (KGC) is a senior mining firm that acquires, explores and develops gold properties in the U.S., Canada, Brazil, Chile, and Mauritania. Kinross was one of the few actively traded gold miners that posted higher revenue from a year ago in Q2, with total sales of $822 million increasing 16% from the comparable 2021 quarter. The company also reported cash and equivalents of $719 million and total liquidity of approximately $2 billion as of the quarter’s end—plenty of capital to take on new projects and fund existing operations. Management also 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 expects all-in sustaining costs per gold equivalent ounce sold 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 the mine at lower costs. Kinross’s 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. Most recently, Kinross announced approval from the Toronto Stock Exchange to increase normal course issuer bid as part of the firm’s $300 million stock buyback program. The amendment increases the maximum number of common shares that may be repurchased (up to 65 million shares), representing 10% of the company’s public float. Purchases under the bid began August 3 and will end no later than next August 3.

“The stock is showing observable relative strength versus most actively traded gold shares, suggesting accumulation by informed interests is taking place. Participants can accordingly purchase a conservative position in KGC using a level slightly under 3.30 as the initial stop-loss on a closing basis. The next earnings report is due out November 9.” BUY

Montauk Renewables (MNTK), originally recommended by Brendan Coffey in his Sector Xpress Greentech Advisor, had a very encouraging bounce-back this week, gaining 16% since our last issue, with almost all of those gains coming today on no obvious news, far as I can tell. The dip prior to that was enough to prompt Brendan to recommend that his SX Greentech Advisor readers sell the stock, mostly because it had tripped his sell-stop around 14.50. But that level seemed to act as support, and now is back with a vengeance. We’ll see if lasts. Last week we downgraded the stock to Hold, and we’ll keep it there for now. HOLD

Ormat Technologies Inc. (ORA), originally recommended by Brendan Coffey in his Sector Xpress Greentech Advisor, was up this week along with most other renewable energy names. It’s been less volatile the last few weeks than most other stocks in its space – in fact, it’s flat for the month of October. Given the upside – it’s the only publicly traded U.S. geothermal company – let’s keep it at Buy. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down about 2.5% this past week but is having a good day today ahead of its Q3 earnings report on Wednesday. We already know the company fell short of third-quarter delivery estimates due to some growing pains at new factories in Germany and Austin, Texas, which should weigh on earnings. But the stock has taken a beating in the weeks since the delivery shortfall news came out, down 30% in the last month(!), and that’s why I think whatever bad news emerges from Wednesday’s report is already baked into the stock price, which is now half of what it was last November on a split-adjusted basis. TSLA never stays down long, and I think it has only (or mostly) upside from here. We’ll see how it reacts to earnings in a couple days. Until then, keeping at Buy. BUY

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had a good week, rising more than 4% since our last issue and knocking on the door of 400 per share again. It’s now up roughly 16% since the May lows, which is really saying something for a beauty retailer in this environment. I like its prospects going forward as we approach the holiday shopping season – especially if the market can get well. BUY

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, continues to hold support in the 32-33 range and has barely budged since we added it to the portfolio two weeks ago. So far, it’s doing the job we hired it to do as the portfolio’s lone fund – that is, provide some stability to counterbalance all the ups and downs (mostly the latter) in most stocks in this bear market. In his latest update, Carl wrote, “The WisdomTree Emerging Markets High Dividend ETF covers 17 different emerging markets and gives broad exposure to large caps, mid-caps and small caps in these countries. 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. In addition, it holds some of the cheapest quality stocks in the world with an average price-to-earnings ratio of just 5.” BUY

Xponential Fitness (XPOF), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, had its first down week since we added it, but it was only down a point. Overall, XPOF remains in its months-long range between 17.8 and 21. 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. Third-quarter earnings are due out November 10. BUY

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