Cabot Stock of the Week Issue: October 24, 2022

Stocks were up again this past week and have recovered nicely since their late-September/early-October bottom. It’s too early to say the worst is definitely behind us, but two straight weeks of gains in 2022 is highly encouraging. The Fed has been a bit less hawkish in its recent comments, which has helped. And there have been a few notable third-quarter earnings season winners, which have also helped.

But the calendar could be the biggest help going forward: In midterm years, dating back to 1950, stocks have been up every year in the six months that followed the midterm elections, according to Ryan Detrick of the Carson Group. It makes sense: Investors gain clarity about the general direction of the country over the ensuing two years, which beats the uncertainty that precedes the election. Of course, most of those years didn’t include 8% inflation, soaring interest rates and a major war raging in Europe. Still, the numbers are the numbers, and they bode well for the coming months.

As always, we’re more interested in what the charts actually tell us, and those have painted a better picture over the last couple weeks. So it’s a good time to add another growth stock with plenty of upside. Tesla (TSLA), of course, has been Stock of the Week’s greatest success story over the years, presciently added to the portfolio by Tim Lutts way back in December 2011, and now sporting a return in the vicinity of 12,000%(!) for those who got in at the start. Today, we add a company that looks to rival Tesla, or at least chip away at its Grand Canyon-sized lead in the electric vehicle market. It was recently recommended by Tyler Laundon in his Cabot Early Opportunities advisory, and here are Tyler’s latest thoughts on it.

Rivian (RIVN)

Rivian is a young electric vehicle (EV) company that has the potential to become one of the more successful new entrants in the market.

The company is going after some of the biggest and most profitable markets, namely pickup trucks, SUVs and commercial vans. On the van front, in September management announced a 50-50 joint venture to produce electric vans at an existing Mercedes factory in Poland, Hungary or Romania.

This is great as it de-risks the company’s European van business and helps Rivian focus on the current launch of consumer vehicles here in the U.S.

Back to the business model, Rivian is looking to monetize customers through sales of vehicles, software and other services. Owning more of the life cycle through software sales than just a vehicle sale and some follow-up service could nearly double revenue for each vehicle sold.

The company is also trying to maintain control over manufacturing, service, dealerships, invoicing, distribution, aftermarket service and more. This is an ambitious plan.

However, if it works Rivian will have control over many aspects of the customer experience that competitors have outsourced. This could lead to some competitive advantages, especially as it looks to sell additional services (insurance, etc.), potentially wrapped up in one subscription/membership.

Right now, the market is hyper-focused on deliveries of Rivian’s first crop of vehicles, the R1T pickup and R1S SUV. These vehicles boast towing capacity of up to 11,000 lbs., 0-60 times as quick as 3 seconds, range up to 400 miles and prices starting at $73,000.

Seeing a Rivian on the road is very much a novelty, much like when Teslas first started to roll out. When you do see one it’s hard not to stop and look. This past weekend I drove to Vermont and saw two R1T pickups – one on the highway near Nashua, NH, and one in the parking lot (picture below) at the Trapp Family Lodge, where I took my family mountain biking. I think they’re pretty cool.

While Q3 results won’t be out until November 9, earlier this month management gave a Q3 production update. Rivian produced 7,363 vehicles in Normal, Illinois, 67% more than it produced in Q2.

Rivian also delivered 6,584 vehicles in Q3, a 47% increase over Q2. This was about 5% higher than analyst expectations.

Management said it’s on track to hit its full-year production target of 25,000 vehicles. That implies around 10,700 vehicles produced in Q4, or 45% more than in Q3.

Following that report, Rivian also issued a recall covering 13,000 vehicles (nearly all they have on the road) due to loose fasteners affecting the driver’s control when steering. That news dented the rally that came after the production update, but big picture, this recall is very minor and the company’s direct-to-consumer (DTC) model made for a very fast response.

If things go to plan, Rivian should be very well positioned to exceed production of 50,000 vehicles in 2023.

The company should also be well-capitalized through most of next year. If market conditions improve, management could take advantage of a stronger share price to complete an equity raise late in 2023.

Turning to revenue, analysts are looking for $1.8 billion this year and $5.9 billion in 2023 (+231%). These numbers will likely be adjusted (possibly significantly) pending Q3 results.

In Cabot Early Opportunities we started with a half-sized position. We will continue to evaluate Rivian’s progress and fill the second half when it seems appropriate, waiting at least until after the Q3 report.

RIVN came public on November 10, 2021, at 78 and jumped 29% that day. Like a lot of IPOs in 2021, it went crazy, closing as high as 172 just a few days later. From then through mid-May 2022, when lockup expiration passed, it was mostly downhill. May 11 was an all-time low, with the stock closing at 20.6.

RIVN has made progress to the upside since then, trading as high as 40 in both mid-August and mid-September. Since the September high it has pulled back to around 30.

Current Recommendations

Changes Since Last Week’s Update
Celsius (CELH) Moves from Hold to Sell
Ulta Beauty (ULTA) Moves from Buy to Hold

We have two changes to the portfolio this week: Energy drink upstart Celsius (CELH) gets the boot after falling too far too fast, while Ulta Beauty (ULTA) gets downgraded to Hold after a surprisingly bad week. Thus, with the addition of Rivian, our portfolio will remain at 13 stocks. Several of our stocks had very good weeks, including cannabis company Green Thumb Industries (GTBIF) in its debut week. Xponential Fitness (XPOF) also remains a bright spot.

Here’s what’s happening with all our positions.

Updates

Arcos Dorados (ARCO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, has taken a hit the last few trading days, especially this morning, when it tumbled more than 4%. There was no obvious reason for the fall, and the stock is still holding above monthlong support around 6.75 as of this writing. In his latest update, Bruce wrote, “Arcos Dorados, which is Spanish for ‘golden arches,’ is the world’s largest independent McDonald’s franchisee. Based in stable Uruguay and listed on the NYSE, the company produces about 72% of its revenues in Brazil, Mexico, Argentina and Chile. The shares are depressed as investors worry about the pandemic, political/social unrest, inflation and currency devaluations. However, the company has a solid brand, high recurring demand, impressive leadership (including founder/chairman who owns a 38% stake) and successful experience in navigating local conditions, along with a solid balance sheet and free cash flow.

“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 (24%) 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 up and down this past week, though it ultimately didn’t budge much ahead of its Q3 earnings report next week (November 2). In his latest update, Tom wrote, “This reliable revenue generator crashed 23% in less than a month. It had been a stalwart in this rotten market for most of the year and then the bottom fell out as interest rates spiked much higher and dividend stocks got a drubbing. That’s surprising because its crucial infrastructure assets are virtually recession-proof and inflation adjustments are built into the contracts. After the knee-jerk reaction to interest rates, the good attributes should again apply to BIP. 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, continues to fall, including a 5% drop-off this morning. This energy drink retailer may well have a bright future as a new leader in that space, but the stock just hasn’t worked out since we added it to the portfolio six weeks ago. Mike cut ties with it recently due to ongoing weakness; let’s do the same here. Sell. MOVE FROM HOLD TO SELL

Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, was up another point this week as it inches back to its October highs. In his latest update, Carl wrote, “Centrus Energy shares got back over 40 this week on relatively low volume. This nuclear fuel supplier for utilities in the U.S. and abroad has net income margins that are above 50% so far this year with new nuclear fuel sales contracts and commitments worth an estimated value of $270 million.

“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 a strong buy.”

Given our big gains in a short amount of time – plus the fact that the stock is still shy of its 50-day moving average – we’ll keep it at Hold for now. But another good week could certainly change that. HOLD

Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was up slightly ahead of earnings this Tuesday (October 25, after the bell). Analysts are anticipating big things: 73.7% revenue growth, 80% earnings per share growth. We’ll keep ENPH at Hold for now and see if the company can live up to those lofty expectations tomorrow. HOLD

Green Thumb Industries (GTBIF), originally recommended by Tim Lutts and then Michael Brush in the Sector Xpress Cannabis Advisor, had a very good first week in our portfolio, up nearly 8% despite a sharp pullback this morning. Perhaps our timing was ideal in adding some cannabis exposure to the portfolio; we’ll have a better gauge on that after the company reports earnings on November 2. Based in Chicago, Green Thumb is one of the largest cannabis companies in the U.S., with 77 retail outlets in 15 markets, and 17 manufacturing facilities. It has been the most profitable multistate company among the large operators, posting profits over the past eight quarters, a sign of good management. BUY

Kinross Gold (KGC), originally recommended by Clif Droke in his Sector Xpress Gold & Metals Advisor, recovered about half its losses from the previous week, as the stock trades in a range between about 3.25 and 4.00. In his latest issue, Clif wrote, “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 above 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’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, added to its recent resurgence, topping 17 for the first time in about three weeks. The recent uptrend is encouraging, especially considering the rough month prior to it. Let’s see if MNTK can keep climbing back toward its September highs above 20. HOLD

Ormat Technologies Inc. (ORA), originally recommended by Brendan Coffey in his Sector Xpress Greentech Advisor, was almost exactly flat this past week. Shares of the only publicly traded U.S. geothermal company have been in a bit of a holding pattern between 82 and 87 ahead of earnings next week (November 2). Brendan sold the stock a couple weeks ago when it broke below his sell-stop, but we’ll hang on to it, as it has recovered nicely since. In fact, we’ll keep it at Buy. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, did not respond well to a weaker-than-expected quarter. The company topped EPS expectations ($1.05 vs. 99 cents expected), but fell short on the top line, with $21.45 billion in sales just short of the $21.96 billion estimated. Those numbers were big improvements over the third quarter a year ago – revenues increased 41.6%, while profits nearly doubled – but Wall Street has focused on the negatives, which included a production shortfall. As a result, the stock was punished, with shares falling 7.7% in the last week. In fact, TSLA is now down more than 100 points in the last month! That seems like overkill for a proven, blue-chip company that’s still growing both its top and bottom lines at breakneck speeds. Even factoring in the production growing pains, TSLA is oversold, and I think the market will realize that quite soon. If you haven’t bought already, this is a chance to get one of the market’s great growth stocks (see our 11-year returns) at a deep discount. BUY

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had a rough week. The stock is down about 5.5% since our last issue, which given the strength of the market since then isn’t great. As of this writing, the stock is trading at its lowest point since early August. Why the sudden fall, after the stock had been an outperformer for weeks? It may have gotten dragged down by weaker-than-expected Q3 sales among other U.S. retailers, though most of them have yet to report. Or, it could be a case of the bears coming for stocks that still had “meat on the bone.” Regardless, it wasn’t encouraging, and the stock now trades below its 50- and 200-day moving averages. We’re at about break-even in our position, so there’s no real net damage done yet. But with no obvious near-term catalyst on the horizon (earnings aren’t due out until early December), let’s downgrade ULTA to Hold. MOVE FROM BUY TO HOLD

WisdomTree Emerging Markets High Dividend Fund (DEM), originally recommended by Carl Delfeld in his Cabot Explorer advisory, is down from 33 to 32 since our last issue, with basically all of those losses coming this morning. Overall, it’s down slightly since we added it to the portfolio earlier this month. The ETF covers 17 different emerging markets and 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. 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, continues to chug along, up about another 4% this past week. Overall, XPOF remains in its months-long range between 17.8 and 21, though it is nearing the top end of that range. 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 31, 2022.